[/caption]Listening to the debate in the UK about abolishing the 50p rate of income tax, I'm struck by the degree to which Karl Marx was right to analyse political decision-making on the basis of different classes fighting for their class interests, rather than those of the population as a whole.
The 20 economists who signed the letter to the Financial Times which sparked off the latest round of debate didn't feel the need to defend their proposition with any actual evidence, beyond some vague hand-waving about hedge-fund managers moving to Switzerland. But they seem to see that as OK, because the letter is basically a statement of class interests so doesn't need empirical support.
I'm always amazed how little actual analysis is considered necessary when it comes to doing things that benefit the rich. This is particularly ironic given the fact that, when it comes to cutting programmes that benefit the poor, elites prefer to adopt a steely resolve despite overwhelming theoretical and historical evidence that fiscal contraction during recessions tends to make the problem worse, not better. The proposition that limiting top tax rates is good for the economy as a whole is taken to be so obvious that it doesn't need proving. Which is a good thing, because the evidence just isn't there.
Take the argument that higher tax rates will cause hedge fund managers, or Andrew Lloyd Webber, or Phil Collins, or whoever, to flee to somewhere more friendly to their cash. This is basically a hysterical anecdote dressed up as an argument. Rich people move countries all the time for all sorts of reasons. But if marginal tax rates (rather than, say, the presence of friends, restaurants and other diversions) were their main motivator then the populations of boring tax havens like the Channel Islands, the Caymans and Bermuda would be vastly larger.
Actual studies have been done on the effect of tax rates on migration--and not just between the culturally distinct, geographically remote population centres of Europe but between U.S. states which share a common language and culture and whose borders often pass through the centres of cities. You'd think those lower barriers to migration would if anything make such tax-shopping more likely, but there's no evidence of it. I guess that explains why the richest people in New York live in Manhattan and Long Island in high-tax New York state, and not across the Hudson in lower-taxed New Jersey.
The other argument is that people will limit their productive activity because of the disincentive of higher marginal taxes--the Laffer curve. This depends on the idea that cutting taxes will actually increase government revenues, because people will be encouraged to do more taxable work.
It's certainly true that if marginal tax rates hit 100%, people have a 0% incentive to do extra work to lift their incomes above this level. But it doesn't follow that the optimal upper rate of marginal tax is therefore always 40% or lower. Indeed, the most recent research on this topic suggests the optimal rate could be above 80%. It's worth noting that, while cutting taxes for the rich is taken to be inextricably linked to strong economic growth, for most western countries it's the three decades following world war two when marginal tax rates were highest and economic growth was strongest.
Of course, 80% is the sort of pips-squeak figure calculated to make rich people wince. How could they afford their lifestyle, if faced with such rates?
Two things strike me on that point. For one, people always seem to read marginal tax rates as describing the portion of their total income that the taxman will take away. When in fact, they only apply to income above very elevated levels--the UK's 50% band is for the slice of income that falls above £150,000. These sorts of changes would only make lifestyle differences to someone spending almost all of a very high income on consumption, and we know that the very rich spend more on saving and investment.
Also, the sorts of spending that the rich worry about affording--mortgages, school fees, cars, wine, luxury goods and high-end holidays--are precisely the sorts of supply-constrained or positional goods whose price is largely a function of the amount of money available to be spent on them. Cut the income of the rich, and the prices of these goods will fall in parallel. And if they don't fall quite as fast, isn't that the shared sacrifice, necessary austerity we're meant to favour?
Hmm... I find that as my income has gone up the less I'm inclined to listen to high tax arguments. In fact, I spend some of each day thinking about how best to manage my company and personal tax efficiently. I see this time spent as a useless product of an excessive tax regime which could be better spent productively. As a company owner paying myself a salary, before I receive money in my personal bank account I pay corporation tax, employer national insurance, personal national insurance and income tax. If I then choose to spend the money, I pay VAT on most of the things I buy with it. I don't like to think what overall proportion of each pound I make is going in tax. And then I wonder what that tax is being spent on and who is spending it on my behalf. Are they spending it as carefully as I would?
ReplyDeleteI look at the state as a sort of vast Walmart. Because it's a massive buyer it can drive better bargains for the same goods and services. There will always be instances of wasteful spending, as there are in any large enterprise. But in aggregate, I think in almost every case where the state is active on a large scale, it can provide the same goods and services much more cheaply than the private sector. This is pretty obviously the case when comparing things like US vs UK healthcare spending.
ReplyDeleteSo my view is that the debate shouldn't be so much about whether tax dollars are spent efficiently--I think they are, pretty well--but whether they're spent on the right things. Should we pay pensions, or have an army, or unemployment or disability benefits? Should we build roads, or subsidise trains, or neither?
I think it's when you start picking that apart that things get interesting. Lots of things seem to be valued so highly and benefit such a broad sector of society that, if the state stops paying for them through taxes, the private sector would end up doing it through other means. Pensions and healthcare are good examples of this: the total cost of hiring someone to a median job in the US is higher than in the UK because you've got to add these benefits, which aren't provided very efficiently.
There's other things that we might all agree to change. Raising the pension age is one example, although I think the fact that this debate goes on largely amongst office-workers explains a lot about why it's so popular: sitting at a desk age 70 is a much more plausible outcome than working in a slaughterhouse or tiling roofs.
Then there's things that don't have a big constituency to back them up. Disability and carer benefits are a classic example. Politically, it probably wouldn't be a massive stretch to get rid of these, but I'm not sure what it says about us as a society.
But I agree with you that the process of paying this stuff is far too byzantine. I think that's the reason business owners are a major "cut tax now" constituency: they're the ones who hiss when the goose is plucked because they deal directly with the payment process, whereas most of us just get it docked from our pay before we see it.
And I think that many lower- and median- income workers should get a tax cut as part of an effort to make the system more progressive, which would also make it cheaper for small businesses to hire. Bracket creep has pushed us ever-closer to a flat tax system, pushing more and more of the burden onto middle- and lower-income groups.
What about reducing the tax around employing new school leavers and graduates? Make them tax free in their first year even? Rather like you don't have to pay student loans back in the UK until a certain earnings threshold is reached. This would hopefully propel people into working more easily then they pay more tax when they hit the middle income bracket. Business owners benefit from lower cost labour and a larger number of fresh minds which leads to faster innovation and so growth of absolute profits.
ReplyDeleteMy comment on whether governement spends wisely was made quickly. I don't know the answer. I agree with your buying power and moral obligation points. I think I'm just naturally inclined towards the 'small state' frame of mind. Ideas like this come into play here as well:
http://www.bothsidesofthetable.com/2010/11/04/understanding-how-the-innovators-dilemma-affects-you/