A particularly gloomy take on current events this morning from Melanie Phillips:
“For with the economy in far worse shape than even the most pessimistic among us had imagined, we appear to have entered a time machine which is blasting us back to the dark ages of state control and economic paralysis.”
There are instantly problems with this comparison – to take the obvious, it’s only really the banking sector the state has started moving into, and you’d be hard pushed to say that it ‘controlled’ banks when it can’t even get those it owns to lend money to small businesses. The idea of the machine ‘blasting us’ towards a point where it’s not just the banks the state controls is scare-mongering – the state has no money to take over anything particularly impressive, we still remember things not working so well the last time it tried, the government is currently trying to offload the state-owned postal service suggesting little appetite for further state expansion and the likely candidates to form the next government are opposed to any such expansion. It also misses the way we got into this mess in the first place – through historically lax state control leading to a necessary take-over of the banking sector. Although there is some comfort to be gained from seeing current events through the prism of history, we shouldn’t let superficial similarities scare us into believing the two are the same – this focuses our fears on the wrong things, meaning we miss the real issues while paranoidly waiting for unrealistic evils to befall us. For example,
“The 50p tax rate has left the out-manoeuvred Blairites aghast for the very reasons that the fossilised Left is triumphant. By singling out the wealthy as scapegoats for the failure of government policy, it implicitly classifies as the enemies of society people whose efforts are essential to its prosperity.”
There are a few things to note about this. Firstly, the Mail was, not so long ago, leading a witch-hunt against the well paid (eg.), which arguably does more to mark out the well-off as enemies of society. More crucial though, the duties on fuel, cigarettes and alcohol all went up in the budget – these all disproportionately affect those on low incomes, making them at least equal targets of the Chancellor’s disapprobation.¹
“It punishes them for the crime of achievement and acts as a powerful disincentive to others to seek success or advancement, thus ensuring the stagnation of the country. It is a throwback to a primitive era of class prejudice and economic illiteracy. It is the dogma of political and economic cavemen.”
This is debatable – one could easily argue that they are being rewarded for high achievement by being offered the opportunity to contribute mote to society, adding additional incentive to succeed. On this argument, the problem here is not the tax, but the ideology pushed by the mainstream media that defines success in terms of materialistic self-aggrandisement. Possibly more compellingly, a 50% rate of tax (rising to 60% with various alterations to personal benefits announced at the same time) on £150,000 leaves the earner with 50p in the pound for every pound over £150,000. Although this is 10p less than they used to get, they still have 40p’s worth of further reasons to strive.² Unlike a salary ceiling, tax brackets do continue to offer incentives to earn, they merely make it slightly more difficult to do so.
“It is also, as the rest of us can clearly see, a fruitless act of cynical spite. Far from increasing tax revenues, it may even mean less money comes into the Exchequer as people resort to various tactics to offset their losses.”
It’s worth considering, at this point, the raft of steps the Chancellor announced in the budget to make it harder to avoid paying tax. More than this, however, is the general point that the Chancellor has to do something to increase the money coming in as the economy tanks. He’s not going to be coining it from corporation tax on the banks any more, what revenues came in from the employment of low earners will be eroded by rising unemployment, a new source must be found. So up go cigarettes and alcohol, increasing incentives for people to source them on the black market to offset their losses. It’s not an option everyone will take, as the costs of such evasion will, for some at least, outweigh the financial benefits – for the increase to result in lower tax-take the number of people evading, and so dropping out, would need to out-weigh the increase secured from those not avoiding. It’s a calculated risk, but to suggest that it’s a risk not taking purely because it is a risk is to say that no tax increase should ever be made as any tax increase will carry the risk of prompting evasion.
“With this huge and increasing burden of higher taxes, red tape and ruinous regulation, yet more entrepreneurs are going to pack up and leave Britain altogether for more hospitable climes.”
There are a few things to consider about concerns of a brain drain. One relates to the Mail‘s equivocal relationship with high-earners – by their lights, it is not just the brains that will be drained, the increase in tax-rate will rebate a certain amount from the public sector and the much demonised banking sector and possibly drive some of the ‘fat-cats’ away, presumably opening the way for thinner cats or people who aren’t cats at all. This is to say nothing about the sense or justice of the measure, but only to note that, from the newspaper’s point of view, this will do much to resolve some of its recent concerns. More pressingly, the evidence of brain drain in countries with high tax rates is equivocal – looking at research into Canada, for example, while there is definite evidence of people moving to the lower-tax regime of the USA to earn more, the numbers are low and appear to be influenced by more than just taxes. This makes intuitive sense – brains need somewhere to drain to (at bare minimum, a job market where they can gain more after tax for the same amount of job which at the same time offers a comparable or better quality of life, difficult to find in the face of a worldwide recession), and to be sufficiently mercenary to be willing to drop their current home and lifestyle to do so. Undoubtedly, some will, but the extent of this is unlikely to be overwhelming.
So the 50p rate of tax is not the obviously bad idea Melanie presents. Indeed, she herself seems confused on the import of it all:
“Indeed, since it was Tory Chancellor Nigel Lawson’s 1988 Budget that reduced the top rate of tax from 60 per cent to 40 per cent, last week’s travesty can be seen as not just burying Blairism, but reverting to the era before Mrs Thatcher came along to try to arrest Britain’s apparently irreversible decline.”
If we’re trying to conclude that Labour are reverting to type using Lawson’s budget, we must also bear in mind from the same that Thatcher was more than happy for the majority of her time in power with a taxation of the rich higher than that of the current Labour government, that this high rate coincided with the arresting of our ‘apparently irreversible decline‘ and that we’re now actually reverting to the dark days before the halcyon days of the Major government (which started in 1990). As such, we should be concluding that this is a bold return to Thatcherite tax policy, and not statism at all. In her attention to the superficial similarities, in this case that Thatcher got rid of a high tax rate, she misses the obvious differences in our situations, such as the fact that the rate of tax wasn’t Labour’s alone and it wasn’t the only thing Thatcher undid.
Nothing is ever as simple as Melanie makes this. After 12 years of Labour, we need a lot more than a 5% increase on the top-rate of income tax to herald a return to ‘the dark ages of state control and economic paralysis‘. The choice isn’t between the dark forces of socialism making us all poor and the bright Reaganomics of the future where the rich get rich and trickle it down. It’s not between a Thatcherite tax regime and a mass exodus of the long-suffering rich. At the moment, the choice is between definite lower tax revenues or possibly slightly less-lower tax revenues. It’s a gloomy choice to have to make, but not as gloomy as a time machine that only took us to the 70s would be.
¹ The Guardian claims that “Early indications suggested the poor would still pay proportionately more than the rich because of a rise in fuel duty.” but don’t provide anything to back the statement up.
² This section is corrected as of 29th April, thanks to Ben (see comments below). The original, incorrect text, read: “with £75,000 after tax (£60,000) – this is still a fairly impressive reason to try and earn £150,000. Taking this further, the maths of the tax-bracket system also means that what disincentive there is only kicks in on a relatively small range of salaries around the £150,000 boundary – the previous 40% rate on a salary of £149,999 meant you took home £90,000; you would need to earn £30,000 more to take home the same amount at a 50% rate. This means that you have no incentive, at £149,999, to earn anything less than £30,001 more, but it would still pay you, increasingly handsomely, to aim at a job worth £180,001 or more.” As Ben kindly and correctly points out, this reading is based on a fundamental misunderstanding of the tax system. Ben is too kind to call me an idiot, but he could very fairly have done so.