Friday, October 20, 2006

Tax Cuts For The Rich

But surely they'd benefit too...

It's most unwise to argue with the excellent Institute For Fiscal Studies. Over the years they have built up a formidable and deserved reputation for serious impartial research into all matters fiscal.

So when they point out that the Forsyth tax proposals wouldn't do much for the poor, you have to listen. Robert Chote, director of the IFS, told BBC Radio 4's Today programme:

"This package, if it were to be implemented in its entirety, is likely to benefit people on relatively high incomes rather than people on relatively low incomes.

"That would certainly be true of the income tax cuts, which help people in the middle or towards the top, and the same with cuts in inheritance tax and capital gains tax.

"It’s also worth bearing in mind that the Conservatives are likely to say that this will be paid for in part by increases in environmental taxes, and these do tend to be, at best, neutral across the income distribution or tend to hit the least well-off harder than the best-off."

Spot on Robert. But the question is, what should we make of it?

The first point is that green taxes were not actually part of Forsyth's recommendations at all. It is certainly true they hit the poor hardest because the poor spend a greater proportion of their incomes on fuel etc. But that's not a just problem for Tory tax policy- it's something all advocates of fashionable green taxation have to answer. So far, there's been virtual silence.

The second, and more fundamental point, is that Forsyth's recommendations on company and personal taxation are designed first and foremost to boost Britain's economic competitiveness and lift our future growth rate. To be sure, they also have an eye to fairness, simplicity and predictability (eg see Report para 1.2.2), but Forsyth is basically about increasing the size of the pie, not how it's divvied up.

Back in the good old post-Keynesian days, consensus economics used to say that growth was determined by technical factors somehow beyond the influence of tax rates. So it didn't matter much if tax was 30, 40, or even 50 per cent of GDP. To help the deserving poor, you could squeeze the idle rich with impunity.

Even at the time, most ordinary people thought that was cobblers, and unfortunately for Big Government, they turned out to be right. (This was yet another area where Keynesian economics totally ignored what the great man himself had said- that there'd be serious difficulties if tax rates went above 25%).

There's now been a fundamental rethink, and the overwhelming conclusion from recent research is that taxes do matter- even the OECD now says that higher taxes have had a major impact in depressing growth (see report).

And the evidence also says that the most damaging (or "distortionary") taxes are those on incomes and capital: the very taxes that bear most heavily on the richer members of society.

So the choice is very simple: either we accept the lower growth that goes with current high levels of these distortionary taxes, or we recognise that our priority tax reductions can do little directly to help the poor. And even worse, not all those who do benefit will be thrusting entrepreneurs creating loads of new jobs and trickle down wealth- some will just be the idle rich.

To pretend we can somehow have our pie and eat it is not only misleading, it also rules out that "grown-up" debate our politicos always reckon they're so keen on. The politics of envy help no-one.

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