Category Archives: Taxation

The Economist’s advice to Labour

Why would the Economist publish an article commending Labour to vote its ‘Blairite candidate’ to the Party leadership? Why would that rather formulaic libertarian publication be concerned?

The Bagehot article purports to be about Liz Kendal, Labour Party MP for Leicester West. But in reality it is just another salvo in the mainstream media’s attempt to ensure Labour poses no threat to the established Osborne-Cameron clique. The main message is the suggestion that Labour lost the election because, under Miliband’s leadership, it moved too far to the left. If it is to have any chance of future election success, it must recover its Blairite centre ground by voting Kendal. That was the suggestion.

Acknowledging Labour lost all but one of its seats in Scotland to the SNP, the article pretends that Scottish failure was all about independence. The establishment is clearly nervous that Labour might follow the SNP example offering policies focused on fairness and social justice, financed by the fruits of economic stimulus rather than being strangled by austerity.

What would happen to Labour support if it were to go against all privatisation of public services in health, education and social welfare, against the fire sale of UK publicly owned assets to foreign investors, and focus on the eradication of poverty, the building of affordable social housing, government subsidized higher education, and serious investment in renewable energy as well as progressive taxation of income and wealth. Such a social democratic programme is currently only advocated in England by the Green Party. But if Labour was persuaded to that position based more on human values than Old Labour class war loyalties, there might be a genuine threat of Labour revival.

With its miniscule majority, the Osborne-Cameron offering of privatisation and surrender to corporate monopolists, might then find the Labour / SNP opposition more than just challenging. If, on the other hand, Labour could be misled into appointing its ‘Blairite candidate’, the challenge would be easily repelled. That is why the mainstream media, including The Economist, is concerned.

Taxation and Growth

The proposition that taxation stifles growth feels like it should be true. A business that is being heavily taxed won’t have as much to invest in its future growth. For the past forty years at least, the idea has been generally accepted, and successive governments have acted accordingly. However, at the macro level, the evidence suggests something quite different. There have been several studies of the long term effects of different levels of taxation. Data from the UK, the United States, Europe and OECD have all shown similar counter-intuitive correlations.

The latest, an American Congressional Report, (Gravelle, J G and Marples D J, (2014), Tax Rates and Economic Growth, Congressional Research Services Report for Congress, January 2nd ) reviews American taxation and growth over the sixty years from 1950. Between 1950 and 1970 the average top marginal income tax rate was 84.8% and GDP growth 3.86% pa. From 1971 to 1986 average top marginal iincome tax rate was 51.8% and GDP growth 2.94%. From 1987-2010 the rates were 36.4% and 2.85% (Source: Bureau of Economic Analysis (BEA) and the Urban-BrookingsTax Policy Center. (BEA is a principal agency of the U.S. Federal Statistical System.)
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Grasping the Nettle Now

So President Francois Hollande has not given up on his election promise to levy a 75% tax on those who pay themselves, or get paid, in excess of €1m (£840,000) pa. The French high court rejected his original proposal, but it seems the revised version, to levy the tax on the payers rather than the recipients, may well prevail. The promise is that it will only be for two years, but Pitt said much the same when he introduced the first British income tax to pay for the Napoleonic wars. If it works, it will no doubt stay and perhaps be built upon

Taxing the income of the very high paid at a higher rate than the low paid is part of what made the French vote for Hollande as President. The people want it. They apparently don’t like the idea that the wealthy are sneering contemptuously from their tax avoiding havens at the poor who are being clobbered left, right and centre. And in that respect the French are probably not much different from the Brits. If a British political party were to advocate a 75% tax rate, with no escape, for those earning a million or more, would it gain support from the mass of people?
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The Real Costs of Globalisation

Globalisation reduces the cost of goods and services as their production migrates to the lowest cost parts of the world. The lower prices are a benefit for everyone and the low cost parts of the world, which are only now beginning to industrialise, gain tremendously in terms of economic growth and employment. So globalisation is a good thing, But there are some downsides. Jobs disappear in the advanced economies as production moves to the developing world. Up to now, the advanced economies have grown, bar a few booms and busts, more or less continuously, for the past 250 years in UK’s case. But the migration of jobs now seems likely in the advanced economies to be permanent and to be bringing the growth phase of their economic development to an end.

Permanent changes like this are difficult to forecast, and even appear difficult to recognise when they have happened. The initial response is to identify the change as a blip. Commentators today are identifying this quarter’s UK GDP data as indicating the end to the ‘double dip recession’. If miniscule GDP growth is recorded two quarters on the trot, commentators will surely be referring to ‘green shoots’. But it is equally likely that the slightly encouraging data this quarter is a blip and from now on, the lack of economic growth will be the steady state in advanced economies, which might more aptly be described as post-industrial.
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Sustainable Wealth of Nations

During the initial phase of industrialisation, Adam Smith argued that a nation’s supply of ‘wants and conveniences’ depended mostly on the ‘skill, dexterity and judgment’ of its workers and the extent to which they were employed. His example was the pin factory in which, through specialisation of work tasks, productivity could be multiplied many thousand fold, so that workers in an industrialised nation could enjoy a hugely enhanced standard of living. Smith argued that the wealthy should pay a greater portion of their income in taxes so the nation could provide education, for example, for the less well-off to compensate for the ‘mental mutilation’ caused by the boring, repetitive nature of their ‘specialised’ work.

So how did we get from that position, identified by the father confessor of industrial capitalism, to where we are today, with the Bob Diamonds, Fred Goodwins and Philip Greens of our world being paid zillions for not very much, the less well-off paying proportionately most in taxes and today’s pin factories run by ‘ruthlessly hard-driving, strictly top-down, command-and-control focused, shareholder-value obsessed, win-at-any-cost business leaders’? One explanation is provided in The Road to Co-operation.
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Cameron Fights for the City against the People

British Prime Ministers and their Chancellors are clearly in the pocket of the City of London, as regularly demonstrated by their red faced compliance at the Lord Mayor’s fancy dress functions. The politicians dutifully swear their allegiance. And they mean it, as Cameron recently showed by vetoing the Franco-German proposal for a timorous financial transaction tax. It might have put some friction into the City’s speculative finance machine and offered a chance of slowing it down and ultimately of reducing its size. Like all his predecessors over the past three decades, Cameron would contemplate no such challenge to the City.

That appears to be the only certain position he holds as he attends the EU summit The rest of his pre-Summit statements appear to be incoherent bluster, largely aimed at placating the emerging Tea Party element of his own party. And specifically not aimed at what he himself previously referred to as ‘rebalancing’ the UK economy.
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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.
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