You have to tax wealth to grow an economy

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I posted a new YouTube video this morning in which I argue that politicians refuse to tax the wealthy because, they say, they might run away if they're taxed, and we'd all be worse off. Except, the opposite is true. Redistributing wealth is the way to deliver growth in an economy like that the UK has at present. When will they get the message?

The transcript is:

You have to tax wealth to grow an economy.

I know that might sound perverse and, to most people, even illogical, but it is a straightforward statement of fact. Any economy that wants to grow has to tax the wealthiest in that community quite heavily and then redistribute the proceeds to the lowest earners in that country if it wants to grow.

Now, I stress this is not a statement of opinion. It is a statement of economic fact and the logic is quite straightforward. The wealthy are wealthy because they do not spend all their income. They save. That's how they accumulate wealth. This really should not be seen as anything very surprising. The trouble is that savings do not boost our economy, whatever our politicians, our Treasury, and those in the Bank of England might think.

Instead, they save. Savings withdraw funds from active use within an economy, and as such, they deflate an economy as a result.

And savings do not fund investment. Bank credit does that.

Nor do savings fund investment by companies*. Almost no company now issues shares for this reason anymore. They only issue them for merger and acquisition activity.

As a result, the wealthy, by saving their income, reduce the level of economic activity in a country. That's an unavoidable fact.

In contrast, those on the lowest incomes in a country tend to spend everything that they earn. Sometimes, in fact, they do more than that. They borrow to fund their current spending out of future earnings.

And what's more, as their earnings rise, they are more inclined to borrow to fund their income now out of future earnings because their capacity to borrow has grown.

So there are two obvious consequences. First, taxing the wealthiest people in the country makes sense.

They've got the capacity to pay.

Taxing them more is unlikely to reduce the amount that they spend in the economy because they're already saving, and taxing them will therefore not harm growth.

Then redistributing the proceeds from taxing the wealthiest to those on the lowest incomes also makes sense. This will increase the amount those on the lowest incomes spend, and almost all of any increase that they get will go on increased consumption to meet their needs. And, therefore it follows that they will fuel growth because that's what their additional spending will do.

So, if you want to grow an economy you have to tax the wealthiest in the community more and redistribute the benefits of the sums raised to those on the lowest incomes. The demand for goods, services, innovation, and investment in that community will always increase as a result of doing so.

This, as I've said before, is a straightforward statement of fact. Now, in that case, why, if every economist knows this, and I think every economist should know this, why doesn't every politician know this, and why are so many people in denial of this?

Are they not telling the truth?

Are they only serving the interests of the rich?

Aren't they interested in helping those on low income?

And aren't they interested in growth?

Those are the obvious questions to ask of those politicians who are in denial of this fact.

But, I also want to put all this in context, and I will use the simple example of a situation where politicians are currently getting this horribly wrong.

Labour is saying that it cannot remove the two-child benefit cap at present. This was introduced by George Osborne to supposedly encourage people to return to work rather than have more children, and he wanted to stop the assistance from the state to large families as a consequence.

The policy has not worked. The birth rate has not changed. Those being penalised are very largely already at work. We just have one million more children and their families in poverty as a consequence of this policy.

Now, what should Labour be doing? It should be increasing tax on the wealthiest. There are lots of ways in which I suggest that we can do this in the Taxing Wealth Report.

It should be removing the two-child benefit cap. And it should be considering what other benefit changes it could make.

How much would removing the benefit cap cost? The highest figure that I've been able to find is £1.8 billion. That's a figure provided by Save the Children.

How much would removing higher rate tax relief on pensions raise a year? £14.5 billion in my estimate.

In other words, simply by reducing the state's subsidy to the savings of the wealthy, we could fund the removal of the two-child benefit cap almost eight times over in my quick mental arithmetic.

However, Labour thinks it's more important to subsidise the savings of the wealthy than it is to take children out of poverty. I don't know why, but it's time they changed their minds. And if they did, they'd also get the growth that they crave.

 * And yes, I know about the new share issue from National Grid - which is a total exception. 

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