David Cameron, Tory leader, appears determined that it will not be just the current government that comes out with serious errors on policy. This refusal to not state that a new, higher tax band of 45 per cent “on the rich” will be repealed is a serious error. The error is to ignore the history of what happens when marginal tax rates are cut – these cuts lead to more, not less, revenue. Now of course, as small-government folk, we support tax cuts because we want taxes to fall, and not because we want higher revenues. But if it is revenues you are worried about, then raising taxes is dumb.
The UK and many other economies are falling down the wrong side of the Laffer Curve. It is profoundly depressing that the lessons I thought had been learned have been so totally lost. It makes me wonder whether any senior politician has a clue about economics whatever. On an earlier Samizdata discussion thread following on from my post about the Kevin Dowd lecture, was a long and very involved debate about the issue of fractional reserve banking, for example. You commenters are a smart bunch and I say, without false modesty, that we rate consistently above many other UK blogs in that respect. I wonder whether there is now a single major politician who has a clue about FRB, the arguments for or against, etc. Seriously, does anyone in the major parties understand even the most basic concepts of economics?
Maybe the most gloomy answer is that some do understand but are too frightened or cynical to do anything about it.
Maybe someone should put this on Mr Cameron’s summer reading list.
It is of course highly questionable whether the 5% jealousy surcharge would raise anywhere near £2bn (or whether it would actually lead to a fall in tax revenues); but this petty bickering averts attention from the vastly more important topic of whether it wouldn’t be better to cut government spending by £100 billion odd and then work out what are the best taxes to cut.
But that isn’t how LibLabCon look at things, what they are doing is Indian Bicycle Marketing – what is important is what wins them more votes; and if the focus groups say that a 5% jealousy surcharge would win more votes than it loses, it goes straight in the manifesto.
I guess that’s why few politicians openly support the Least Bad Tax, because they are gambling on the selectorate being just as economically illiterate as they are.
Mark, well quite.
As for the “least bad tax”, lemme guess what you mean. The Land Value Tax.
I’ll grant you this much, Mark – your bloody persistent.
Of course politicians are clueless idiots. The only real talent most of them have is their social networking skills. Most know next to nothing about history, science, philosophy, engineering, or economics. We would probably have more competent leaders if we dropped elections and just chose people by a lottery.
What Mark said. The economics is always subordinate to the politics. If Mori told Cameron he’d go up five points if he painted his arse green on St Patrick’s Day he would.
31st March at the Policy Exchange. “Beyond Inflation targetting”.
I’m speaking, and I’m not defending monopolised central banking, that’s for sure. I’m hoping to add to Kevin Dowd’s excellent speaach, and hopefully show something new to some Westminster Politico types. I promise some fireworks.
Somebody from the BoE and Anatole Kaletsky was supposed to be speaking as well, but the turned tail and feld. Cowards. But I have heard this morning that the have found an ex staffer fromthe BoE to speak, who beleives that with a a little ‘tweaking’ resreve banking and inflation targetting can work.
Whatever Call-me-Dave’s faults, he is not actually stupid.
I have no doubt that he knows exactly what the effects of a jealousy tax would be.
However, what matters to him at present (and probably always), is not what effect the policy would have, but effect his words will have.
He is playing to the deluded gallery, just like all the rest.
That is one reason why their policies are all the same.
Most of these people are professional politicians who’ve done their PPEs at the same Universities, and probably the same Colleges. I haven’t checked, since I’m feeling lazy this morning, but I doubt that any of them have done much real work in their lives. A bit of lawyering and the odd directorship at a QUANGO or rent-seeking company maybe, but the rest of it has been getting elected and climbing the greasy pole in the party, and they will say anything and do anything to reach their goal.
Their PPEs are probably in Socialism, Post-modernism and Keynsianism, (or maybe outright Marxist economics), so that’s what they fall back on when they accomplish their sole aim in life.
Any student idealism has long been drummed out of them by the rough and tumble of politics and they see the rest of us as objects to be manipulated in order to get where they want to be.
The electorate will be promised bread and circuses, and those with money and/or power will be promised quid pro quo for their support.
The politicians, their advisors, and the civil servants in their ministeries have the same tools – economic and political theories, models and strategies – to try to cope with what they’ve been hit with, and their outside backers in industry and finance are reading from the same playbook and angling for advantage for themselves.
I’m afraid we’re going to have to ride this one down all the way, since their isn’t an appreciable body of countervailing thought in any position to influence the outcome.
There then follow, painfully, example after example of laws passed that not only did not alleviate the conditions they were intended to, but actually made them worse, many fatally.
– The Man Against the State(Link), Herbert Spencer, 1884.
Plus ca change, plus c’est la meme chose.
Johnathan wrote
Of course they do! They all know the only economist who matters, Lord Keynes(Link + pdf warning), who said they should spend, spend, spend (other people’s money). That was the end of economics as far as politicians are concerned. And it has been official since at least 1965.(Link) Where have you been?
I’m not an economist, and I’m keen to be corrected if the following is a fallacy, but it strikes me also that raising the top rate of tax will have almost no effect at all on the incomes of professional people, lawyers and so on, who earn more than £150,000 year, because in general it’s not possible to substitute the work of lower-paid people for their services; thus they can raise their fees to cover the increase in tax without losing any work. Therefore the burden of the tax increases will fall on generally lower-paid people who occasionally buy, directly or indirectly, the services of well-paid professionals.
I am not an economist either Graham, so feel free to ignore this, but as I understand it the theory goes something like this.
Yes, professionals, and others who earn more than the magic number, will increase their fees to compensate for higher taxes, and this will have knock on effects on the prices that companies charge for their goods and services. As you hint at in your comment, it’s not just lawyers, but PR consultants, IT consultancy firms, architects and all sorts of other people who sell goods and services to us directly, or to companies which sell us goods and services.
In addition, all those whose incomes exceed the magic number will take all the steps they can to avoid paying extra taxes, including moving themselves and their companies offshore and/or working fewer hours.
This will have the effect of reducing the tax take of the government since a large part of the total tax revenue is paid by high earners.
So the government will be faced with high inflation and a reducing tax income as the unemployment rate goes up and the pressure on welfare services increases.
The government will then increase taxes on all those who are left working which will raise prices and unemployment. Each year another big tranche of the boomer generation will retire and start claiming their pensions so the government will be forced to raise taxes again and….
Being responsible people, our leaders will, in the middle of all this, impose massive taxes and swingeing regulations on industry in the form of energy taxes and cap’n’trade, in order to save Gaia from the nasty gas which gives life to every living thing on this planet.
This is called economics.
Don’t forget my opinion on the Laffer curve!
I have read, I think in the Telegraph, that the 45% tax band will raise annually around £2billion in extra tax, and that there are 400,000 people in the UK earning over the £150,000pa on which the tax will be payable.
For £2B to be raised from 400,000 people, they must, on average pay an extra £5,000 tax per annum. With the extra tax rate being 5%, they must earn, on average, £100,000 on which that extra 5% will be payable.
I must express quite some surprise if it is actually true that the average annual salary of those earning over £150,000 pa is £250,000.
And this doubt comes before any tax avoidance or Laffer curve effect: just a bit of arithmetic!
Best regards
Mark Wadsworth: “whether the 5% jealousy surcharge…”
‘jealousy’? That is rich coming from an LVT supporter!
The 45p band is mutton-headed in the extreme. I suspect it will yield zero income and cost more to administer. State “salaried unemployed” 1, UK 0.
That Laffer curve post was an interesting read Dale. One bit in the comments leapt out at me:
Ah, those halcyon good old days of 2006!
@ TC, ahem, a ‘jealousy surcharge’ is a technical term for a tax that is not primarily designed to be a revenue raiser, it is a purely politically motivated thing with no regard to economic impact (see Graham Asher) or whether it actually increases revenues.
LVT (seeing as you started) is designed very much as a revenue raiser (ideally all other taxes go in the bin and there’s just LVT which would reduce total tax burden/take to about fifteen per cent of GDP), but there’s no higher or lower rates, it just taxes rental or capital values at a flat % for simplicity and that’s the end of the matter. So a multi-millionaire who chooses to live in an average house pays no more than the average family.
Going back to the original story – I don’t think there is
a lack of understanding at all.
There is FAR TOO MUCH historical evidence on the effects of raising and lowering taxes for almost ANYONE to be ignorant unless they have been living on another planet.
This is all about power and control over other people.
There are no good or well meaning intentions. It is ALL meant to increase control over the average ‘person’.
It is gotten away with because, lowering taxes will increase revenue ( just like more guns leads to less crime !! ) is SO COUNTER INTUITIVE that there simply aren’t enough ‘voters’ or people with sufficient influence to effectively SINK THE IDEA !!.
How many time do you hear ‘the government will pay for it’ ???
Milton Friedman once said that if you could change every occurrence of the above phrase to ‘the taxpayers will pay for it’ that there might be some meaningful economic policies developed.
I was having a dinner discussion with my father recently, in which I explained to him the damage which will be slowly wrought upon the American economy by the current shenanigans of the Obama administration and by the FED. I explained to him about the slowly building deficit which in 9 years is expected to hit some 9 trillion dollars due to the current presidency’s spending obligations, this on top of the existing 9 trillion total deficit. (as an aside I believe that the 9 tirllion is an altogether conservative figure that might end up considerably larger)
In any case, my father asked me how the people in congress could possibly be so ignorant of such basic economics, and so willing to legislate their own country into steadily greater poverty.. My basic answer to them, and this is also what I think about the politicians in Britain, was that they are not entirely ignorant, theyre simply following the inertia of the system they feed off of.
Having already long since entrenched themselves into a political machine which by its nature will keep doing destructive things to foster its own growth, senior politicians have completely lost sight of or caring for the fact that their policies cannot do anything but harm.
Its not that they are stupid (as cen clearly be seen by the post office financial success of many political people) its that partly they’ve lost sight of reality, partly that they have too much vested interest in their own destructive creations, and partly that they dont care to relearn the objective truth.
There’s similar and worse happening in America. Here’s a good article about the “Employee Free Choice Act” – http://economicthought.net/ (most recent post)
The depressing thing is that Mr Cameron may well honestly think he is presenting the “free market” alternative.
Think (as the commentors above have noted) about the sort of stuff that was presented at his Oxford college – in comparison to that Cameron (and John M. of the Economist magazine and so on) are free market.
Only a rather odd person goes through life thinking not just “I think this stuff is not wrong, but utter drivil with no connection to the truth at all”.
I thought that at junior school (for example I was angered by the contradiction between “bring food to share with your friends, and then having the food stolen by teachers to be given to my enemies”) – and I, decades later, rejected the “free market alternative” of “free market economists” when I did not think it was free market at all.
But it is not Mr Cameron who is odd – it is me.
A mind that subjects everything to critical examination (that does not assume certain things to be correct and then build on those things via various interpretations) is NOT a good type of mind to have – as far as getting on in the world is concerned.
Most modern situations come down to things like “how do we get this subsidy” (or whatever).
What possible use (to himself or to employers) is a mind that thinks “subidies are wrong” or “this business practice is investing in nothing”, or “this inverted pyramid of debt is fraud”.
And so on.
Seeking first principles (and being very critical of them, only adopting them after savage mental examination) and then reasoning on the basis of those principles (rather than what general society assumes is correct) makes a man virtually useless for all practical purposes.
Wheeee!
Here’s an interesting article on why currently-reported profits may be illusory; ignorant politicians may be drowning us in a morass the depth of which is far worse than it seems.