Tax and Grow

Aside from IQ, what do Fred ‘The Shred’ Goodwin, the Duke of Westminster, the Prince of Wales and dear old Bob Diamond have in common? Well, it’s not absolutely certain, but there’s a strong probability that they pay a lower rate of tax than you do. The interesting thing is ‘why?’ There are two reasons.

There is an elaborate theoretical structure which seeks to justify not taxing the rich. It operates at many different levels. There’s the Tea Partyish argument that tax is Bad. This is because government is Bad. Because government can only stop things happening, get in the way and generally inhibit the entrepreneurial dynamism of people like Fred, the Duke, the Prince, and Bob. Government and all its works should be minimised.

A slightly more subtle argument is that taxing the rich reduces their ability to invest in the entrepreneurial dynamism which drives the economic growth which creates jobs which enrich the rest of us. This is the trickle down argument: we all gain if the rich are taxed less. This is promulgated by a mass of tax avoiding ‘charities’ and ‘think’ tanks whose urgent intent is to minimise the tax on their sponsors, who probably include Fred, Bob and the rest. It has become a matter of faith, fundamental to a whole belief system, and therefore largely immune to the rational analysis to which it has been subject.

Relevant data is well known and well documented as, for example, in the National Bureau of Economic Research. The period 1947-1973 was a time of high marginal and progressive tax rates and high growth almost everywhere. In US the top income tax rate varied between 75% and 90% and the economy was growing at an average of 4% pa. In UK, the marginal tax rates were even higher but growth was similarly maintained. In the later period, during and post-Reagan and Thatcher, greatly reduced taxation was accompanied by much lower rates of growth. Nevertheless, all that is claimed is the proof that high marginal and progressive taxes do not prevent growth.

On the other hand, the argument that low and even regressive taxes result in growth, is palpably false, as is currently being experienced. There never was any evidence that low and regressive taxation caused growth, but today more than ever it is clearly fallacious. Part of the reason lies in the fact that Fred and Bob’s riches are invested by professionals in predominantly financial, speculative assets, rather than physical ones, and as far as is legal, will be lodged in havens where they are secure from theft by tax authorities. So only Fred and Bob really gain.

However, reduced taxes on the poor do inevitably cause economic growth because they have no alternative but to spend all they have.
Thus, the two reasons why the rich pay less tax than the rest of us. Firstly, because there is this elaborate theoretical argument, raised by vested interests, that we all benefit from their minimal taxes. Secondly, because some people, possibly including Fred et al, might actually believe the first argument. But that would bring us back to considerations of IQ.

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