Allister Heath, over at CityAM, the free daily newspaper with a strong financial twist, seems at times to be about the only journalist in London making a robust case for free market capitalism, limited government and low taxes. Given how such a message is almost deemed off limits these days in the Conservative Party, and even City types seem shy about doing so, Allister’s editorials are a rare blast of good sense. He’s on good form today with this:
“Economics is not always intuitive – and that is what makes it such a fascinating and important discipline. Take what economists call “incidence” – the study of who actually bears the burden of a particular tax. It is obvious enough that employees pay income tax. But it is much harder to actually work out who really ends up paying for other taxes; voters are often fooled into thinking that somebody else, usually big business, is being hit by higher taxes while in fact it is them who are picking up the tab, albeit in a way that is impossible to detect.”
Exactly. With a lot of economic arguments, such as law of comparative advantage, the insight is not immediately obvious. That is why, for example, protectionist politicians can win votes by claiming that those evil foreigners are “taking our jobs” – it takes a bit of understanding to see the fallacy in this. And the tax incidence issue that is highlighted here is a good one. There is not just a tax incidence effect where a tax on a sector, such as banks, hits everyone. There is also regulatory incidence too. I don’t know exact numbers, but all the various health, safety, equality, and other rules that are imposed on firms add greatly to the total cost of buying a product. Consider how much of the regulatory burden, for example, translates into the actual price you pay for a car, fridge, or even step-ladder.
So the Tories, in their bid for power, want to impose a tax on banks, and imagine that most voters will cheer and say, “good on yer iDave, give the banks a hard time!” and then fail to join the dots when they wonder why the interest on their accounts is so poor, or why it seems a bit harder to get a loan these days or why buying foreign exchange appears to be a rip-off.