The Mirrlees report assumes that savings equal deferred consumption.
As such their whole approach to the tax of savings assumes that this is simply an issue of when to recognise income during a persons lifetime and so tax them.
Oh dear. Yet another false assumption. Our society does of course include many people who make savings with the view to undertaking future consumption — most especially through the saving of pensions. But this is a relatively small part of the overall savings market. The vast majority of people never undertake enough saving to accumulate any serious wealth. But serious wealth exists. And it is inherited, accumulated and largely unearned. This fact they utterly ignore.
But they do all they can to benefit those who own that wealth. They would like a system where all sums saved be exempt from tax. And that all sums withdrawn from savings be taxed. Because of the sheer absurdity of identifying what is and is not savings in this case they instead use this logic to argue that interest earned be wholly exempt from tax (a measure that in itself is, of course, designed, I presume deliberately, to increase the gap between the rich and the poor in this country by introducing a fundamentally regressive differential in the tax base).
Of course this looks fine in their model where there is no opening capital. But when there is opening capital — and massive amount of it — then the reliefs they suggest investment means that the capital of those who start the process with capital accumulates substantially faster than the capital of the person who has to save out of income alone. The differential can never be made up so divisions in society will increase. And I presume that is their intention. Because surely they did not fail to notice this?
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Richard:
I fully agree! Perhaps one should just add that the implicit assumption is that of ‘prior savings’; ie, the Treasury view that investment only takes place where there is a pool of savings to draw upon which has not been ‘taxed away’ by goverment. Keynes firmly rejected the Treasury view, arguing the the causality was not from dS ==> dY, but rather from state-financed investment dIs==> dY ==> dS; (d above stands for ‘delta’). Thus, for Keynes, investment must be boosted to raised national income which in turn raises savings, in effect turning the Treasury view on its head.
Best/George
Thanks for your various posts on Mirrlees, Richard, as I wouldn’t normally have picked this up. Clearly in todays political/economic climate that would have been a mistake as their ‘findings’ – and I use that term with caution here – will be welcome news for many of a certain political ilk.
Coincidentaly, a recently wrote some material on postgraduate research in which I reminded my students that it was accepted best practice nowadays to be explicit about the assumptions and beliefs that inform research design and practice. This includes critically evaluating the particular paradigm(s), theories and concepts that underlie the work. I wonder if this happened on this occassion?
From your various summaries (and returning to a point I made about the nature of research to another of your blogs today, what we have here – despite the claims of the authors – is not empirical research but
@GWI
Absolutely right. But these guys are probably among that group who think that Keynes rhymes with Milton Keynes so far is their understanding of the issue.
@Ivan Horrocks
the review is being funded by the Nuffield foundation, for whom I undertake peer reviews, and by the ESRC – to the tune of several million pounds, and they claim that it is academic because it is based upon empirical review of other tax systems.
The difficulty is, however, that if you make the wrong assumptions at the outset you get the wrong answers, however good the analysis. They don’t understand this. But that’s the reality.