I Believe in the Father Christmas Economics of Cloud Cuckoo Land
Adrian Hilton thinks Vince Cable and Danny Alexander are wrong to oppose the abolition of the 50p tax rate.
4 Aug 2011, 09:08
Vince Cable: He doesn't believe in Father Christmas
In this assertion of impossibility, Vince is supported by his LibDem colleague Danny Alexander, the Chief Secretary to the Treasury. The priority, he says, is on reducing the tax burden on low and middle incomes; lifting the threshold to £10,000. This is a laudable objective – morally, politically and economically – and should have been Conservative policy years ago. While Vince invokes Father Christmas, Danny alludes to ‘The Birds’ of Aristophanes: “Anyone who thinks we are going to shift our priority to reducing the tax burden for the wealthiest they have got another thing coming... The idea that we are going to shift our focus to the wealthiest in the country at a time when everyone is under pressure is just in cloud cuckoo land.”
The interesting thing is that for all the associations of Cloud Cuckoo Land with optimistic delusion, naivety and idealism, it’s really rather a rational and economically viable place. It is ‘where Theogenes keeps lots of money / and Aeschines hides all his assets’. They have gods who are revered and respected, and the authorities maintain a well-equipped military for Cloudcuckooites’ security. They go to war but sue for peace. The arts flourish – drama, poetry and music – and there’s a legal system with court officers to uphold legal decrees. They ‘don’t disparage things divine’, but sprinkle holy water and hold state ceremonies with a reverent minute’s silence. There’s a state education system which provides instruction in maths, geometry and science, with a rich appreciation of philosophy and astronomy. People have jobs and are paid salaries (and some are paid for not working at all…). And like the UK in the EU, ‘Residents of Cloudcuckooland must use / the same weights and measures and currency / as those in Olophyxia’.
However, unlike the UK in the EU, Cloud Cuckoo Land was concerned to retain its political sovereignty, and so, with a hint of ‘Up Yours, Delors!’, the foreign statute-seller is told: ‘Take your laws and shove off!’. It is, by all accounts, ‘a finely ordered state’ and a ‘happy town’ where everyone enjoys the NHS objective of very good health. Yes, there’s a bit of slavery, but we’ve got some of that here as well, and at least Cloudcuckooite slaves are free to wear their hair as long as they want.
So, having established that an appeal to Cloud Cuckoo Land actually undermines Danny Alexander’s argument, what about Vince’s Father Christmas?
It is obvious to all who bother to learn from the history of the 1970s and the Thatcherite revolution that punitive rates of tax actually harm a nation’s economy. Labour’s 50p rate, which was introduced as a political trap for the Conservatives on the run-up to the 2010 General Election, is just winding back the clock to an era when the nation’s entrepreneurs and wealth creators simply emigrated to low-tax provinces. And so we lose not only their brains and passion, but the entirety of their economic input, including their personal taxation paid even at the basic rate.
With free movement of people, there’s absolutely nothing stopping those who earn millions from moving to (say) Switzerland. The Treasury then loses not only £500,000 in every £million, but also every 10p in the pound (not to mention their National Insurance contributions). When Nigel Lawson slashed the top rate of income tax from 83p to 60p and then to 40p, the Treasury tax-take actually increased. I won’t go into tedious stats and Laffer curves, but less than 1% of the population earns more than £150,000, yet they contribute more than 22% of the nation’s income tax. Surely even a LibDem can see that for every one of these who decides to pack up and go, the overall tax revenue decreases considerably and disproportionately.
Thanks to Labour, the UK economy is in bit of state. That’s how Labour tends to leave it after every period in office. There’s no easy quick fix, and it’s down (as ever) to the traditional Tory approach of balancing the budget – addressing the fiscal deficit while paying down the debt. When taxes are high and uncompetitive, incentives to invest are reduced, the economy stagnates, and the pain and suffering of everyone is simply prolonged. The Government pledged itself to sorting out the economic morass as an absolute priority. The 50p tax rate is nothing to do with the fiscal deficit or paying down the national debt: it’s about the politics of perception and the compromise of coalition. Empirically, it has been established that scrapping it would raise more money.
I not only want to live in Cloud Cuckoo Land: I passionately believe in Father Christmas economics.
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Adrian Hilton
Adrian Hilton is a conservative academic, religious and political commentator, journalist and author.
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Comments (4)
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Full of the usual Tory blather and bluster, without any actual facts. The usual right-wing assertion that the Laffer Curve is in effect (please do provide some links of the studies you've read that use genuine data to establish where on the curve we are please), and bleating on about the supposed mess Labour created (erm, global recession anyone?).
The fact is, there will be some effect if you bring tax rates down from 83% to 40% because it's a massive change, and it was one that needed to be made. But going from 40% back to 50% will not necessarily reverse 10/33rd of that effect because the world isn't nice and linear like that. Have you, out of interest, perused the data since the 50% rate was brought in? Last I heard, tax receipts were actually up. It's not just in the US where right wingers assert that tax cuts pay for themselves, and it's not just in the US where they are wrong.
If all these entrepreneurs are heading off to Switzerland because in each pound over that 150,000th one they earn gives them 10p less, that is a shame, but I doubt it's that 10p that's driving them to make the decision.
And to pretend otherwise is to open yourself up to all the kinds of bleating that you're responding to by Lib Dems and others.
04/08/2011 10:27I would like to ask Vince (Peter Principle) Cable one simple question, 'do you believe that if the top rate of tax were changed to 40% tax receipts would go up or down?'
If he answers 'down' he is economically illiterate as, despite @James Reade's bluster above, there is plenty of evidence that the tax take increases as the top rate lowers, the Laffer curve lives. Whilst the amount of tax paid by the highest earners individually may decrease the State does better because there are more of them.
The top 1% of tax payers in this country pay 24.1% of the tax. I have heard that you only need to earn circa £117k per annum to get into the top 1%. Within that 1% I surmise that the big earners, the top 0.1% say, will pay probably 15%-20% of the tax. They are the most mobile with the greatest ability to structure their finances. Therefore it follows that if a top rate of 50% pisses off that top 0.1% then the result will be a drop in tax revenues of probably 10%+. Sharp move that 50% rate.
@James Reade suggests that tax receipts are up, if that is the case I bet that the receipts from the top 0.1% are down.
04/08/2011 10:47A parable for Vince Cable and Clueless (hattip Dan Hannan)
The figures are cut and pasted but the principle is correct.
Suppose that every day, ten men went to the pub, and drank exactly £100 worth of ale among them. If they paid their bill the way we pay our taxes, the breakdown would be roughly as follows:
04/08/2011 10:49The first four men (the poorest) would pay nothing. The fifth would pay £1. The sixth would pay £3. The seventh would pay £7. The eighth would pay £12. The ninth would pay £18. The tenth man (the richest) would pay £59. So, that’s what they decided to do.
The ten men drank contentedly together in the saloon bar until the landlord, meaning to be helpful, presented them with a dilemma. “Gentlemen,” he said, “you’re my best customers. To show you how much I appreciate your trade, I’d like to give you a discount. From now on, I’ll knock £20 of the total bill for your drinks”. Drinks for the ten men would now cost just £80.
The group wanted to carry on splitting their bill in the way that we pay our taxes. So, obviously, the first four men, those least well off, would continue to enjoy free beer. What, though, of the other six? How could they divide the £20 discount in such a way that everyone got his fair share of the windfall? They realised that £20 divided by six is £3.33. But if they subtracted that from everybody’s share, then the fifth man and the sixth man would each end up being paid to drink.
So, the bar owner suggested that it would be fair to reduce each man’s bill by a higher percentage the poorer he was, following the principle of the tax system they had been using. This is how the bill now looked.
The fifth man, like the first four, now paid nothing (100 per cent saving). The sixth now paid £2 instead of £3 (33 per cent saving). The seventh now paid £5 instead of £7 (28 per cent saving). The eighth now paid £9 instead of £12 (25 per cent saving). The ninth now paid £14 instead of £18 (22 per cent saving). The tenth now paid £49 instead of £59 (16 per cent saving). Each of the six was better off than before. And the first four continued to enjoy free booze. But, as they left the pub, the men began to compare their savings.
“I only got a pound out of the £20 saving,” declared the sixth man. He jabbed an accusing finger at the tenth man,”Why should he get £10?” “Too right,” exclaimed the fifth man. “I only saved a pound too. It’s unfair that he got ten times more benefit than me!” “That’s true!” shouted the seventh man. “Why should he get £10 back, when I got two measly quid? The system is rigged in favour of the toffs!” “Wait a minute,” yelled the first four men in unison, “we didn’t get anything at all. It’s always the worst off who get neglected by the politicians!”
The nine men dragged the tenth into the car park and gave him a thorough kicking.
The next night the tenth man didn’t show up for drinks, so the nine sat down and had their beer without him. But when the bill came, they found that their money didn’t even cover half of it.
@startledcod: There's plenty of evidence the Laffer Curve lives, is there? Please do, as requested, link it up. Particularly, please link up the evidence that a change of 50% back down to 40% will have some dramatic effect on tax receipts. I am eagerly awaiting this from someone as economically literate as your good self.
04/08/2011 12:40