Ed Balls will argue this morning that the Conservatives would, if re-elected, cut the top rate of income tax to 40% whilst increasing taxes on the rest of the population of the UK. This, he will say, is part of their continuing faith in trickle down economics.
I think Ed Balls is on safe ground arguing this. The Conservatives remain wedded to the belief that the richest need tax cuts to encourage them to work whilst the poorest need economic sanctions to achieve the same goal. The evidence is already clear from their actions in the parliament. They have cut the top rate of income tax. They have cut the rate of corporation tax, which benefits those with wealth most. They have increased VAT significantly, which impacts those on lowest earnings most. And they have introduced penal changes to many aspects of the social security system.
This is, of course, economically illiterate. The marginal analysis on which so much conventional economic thinking relies says that the more a person has of something the less they respond to more of it. So, quite logically, the more income someone has the less each additional pound of income is worth to them. Conversely, when someone has very little any change in their income is very significant.
What that, inevitably and actually means is that tax cuts for the rich are expensive with little impact on their well being and little consequent impact on the economy, precisely because they do not know what to do with the extra money and so quite often do little that adds value to the economy as a whole. Mostly such gains will be used to fuel asset price inflation such as stock market booms and housing bubbles.
On the other hand penalties on the lowest paid have a significant impact on well being and on the economy because pound for pound such penalties withdraw spending from the economy as well as causing individual harm.
Ed Balls suggestion as to the Tory plan is evidence based. So is the reasoning as to why it is wholly inappropriate for the UK. Increasing inequality at this time can only cause economic harm to the UK and most people oppose it. That's why the message has to be repeated time and again.
Introducing the equivalent of an NIC charge on investment income, as I suggested via Polly Toynbee's column in the Guardian yesterday, would be an appropriate counter measure to increase economic justice and reduce inequality in the UK. It would be good to hear such ideas from Labour.
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The coalition have also raised the personal allowance to reduce the marginal tax rate for the low paid. The universal credit idea is also in part to try and reduce the high effective marginal tax rates that Brown’s tax credit system engendered.
“Introducing the equivalent of an NIC charge on investment income, as I suggested via Polly Toynbee’s column in the Guardian yesterday, would be an appropriate counter measure to increase economic justice and reduce inequality in the UK.”
It would also be economic lunacy. There is a reason capital is taxed less than labour, as the substitution effects are much gerater for capital income. Thus the loss of economic activity for a given level of taxation is higher for capital than labour.
You should try reading some Vickrey or Mirrlees – the latter did after all get a Nobel prize for this work.
The premises for your claims are biased to capital. That makes the conclusions dubious
Read some work on inequality and its impact
Then you might realise what I mean
Biased to capital? There is a wealth of research out there, plus a few Nobel prizes, which show that taxing capital at the same rates as labour is delitrious to economic growth. It will make an economy grow slower.
Here’s some more for you:
http://www.minneapolisfed.org/research/qr/qr2331.pdf
This has nothing to do with inequality. I assume you are now going to reference the rather dubious claims of “The Spirity Level” or works of that ilk to attempt to prove your point.
Regardless, reducing economic growth is highly unlikely to benefit the poorest in society. Even if wealth taxes or increasing taxes on capital do “reduce inequality”, would it be worth doing so if it made the economy as a whole poorer?
Some of us think there is nothing at all dubious about the Spirit Level
Some of us think that your supposed studies ignore all the obvious externalities that Pickett and Wilkinson documented extremely
Some of us think the studies on which you rely deliberately ignored those externalities for reasons of dogma (the assumptions of neoclassical economics are deeply dogmatic) and in some cases because they wished for a pre-ordained result
Some of us are as a result quite convinced that reducing inequality will quite emphatically increase overall growth and well being, including quite definitely for the poorest
Some of us think your bringing the poorest into your argument is profoundly cynical
So, if cutting the tax rate is so bad Mr. M., how come cutting it from 50p to 45p seems to have brought more cash into HMG? If high tax rates bring in more cash why not set the rate at 80%?
Mr. M., if the 50p tax rate is such a great idea, why do you think the Labour govt. never brought it in from the beginning?
We are well aware that it has not done so
That is the result of forestalling and backstalling
I certainly hope that if Labour get into power next year, and if Balls becomes Chancellor (or even if he gets some other office within government), he’s able to put his money where his mouth currently is a bit more effectively than he did when he was Gordon Brown’s right hand man, Richard. Because as you know, and as Richard Brooks sets out clearly in ‘The Great Tax Robbery’, the Treasury team under Brown and Balls were responsible for a whole raft of actions and deliberate inaction that facilitated tax avoidance. More profoundly still as it has turned out, they were also guilty of inviting into government a swathe a people who were then able to influence policy in a biased and grotesquely uneven way, as well as facilitate a step-change in the corporate capture of the state which the Tories have subsequently used as the basis for the total surrender of government to the 1%.
I entirely agree
And share your concerns
We need to make a distinction between earned and unearned income and tax the latter more highly and preferably not tax the former at all. (Employees NICs are not a tax at all in my view, so far as it relates to the state pension and excessive salaries are generally economic rent, which is also unearned.) The owners of capital do not ‘earn’ a return in any sense. True entrepreneurs who own the capital which they use do earn a return from their labour, but not from the capital.
I agree
If it is true that the more income someone has the less it is worth to them, then why do rich people go to such lengths to not pay tax? And why are they frequently accused of profiteering – extracting as much out of a situation as possible? And why do they insist on massive pay rises on top of their already high incomes?
The answer can be found in the theory of conspicuous consumption by Thorstein Veblen http://en.wikipedia.org/wiki/Thorstein_Veblen
I think you have got your self obsessed with conspicuous consumption.
Amused 🙂
You forget that there are people who earn a living supplying the people who you accuse of consuming too much. From your comment you don’t seem to understand it at all. It says so much about you.
I know if income was redistributed more people could earn a living
That does indeed say quits a lot about me
You have made my point. You seem not to understand the issues. By providing jobs for people they are getting a living. If someone starts a company and is successful then why shouldn’t they spend their money on what they want.
The point is they don’t spend, they accumulate and that means they do not create more jobs
Redistributing does create more jobs
How does taking money off someone create a job?
Because others spend it
It is called redistribution
SO there really isn’t any point in starting companies in the UK.
That is a ridiculous conclusion without any substance at all to it