The real way to soak the rich

There was a time when, around the world, a significant proportion of left-of-centre politicians started to wake up to why some of the attitudes traditionally associated with the left had been destroying jobs and wealth.

These politicians often used names like "New Democrats" or "New Labour." Unfortunately their attempts to find a "Third Way" all too often turned out to be a blind alley and they often moved from one set of absurd and exploded socialist ideology to a belief that they could similarly ignore any principles they found inconvenient - leading to disasters in the political field like the Iraq war and in the economics field like Gordon Brown's absurd belief that he had abolished "Boom and Bust."

But with all their faults, that kind of left winger had learned one lesson that the modern left is busily forgetting again, or pretending to which is in some ways worse: that confiscatory rates of taxation on the rich do not actually help the poor because they do not bring in more money.

I think it was Paul Keating, former Australian Treasurer and later PM, who put this best at an international conference when he said something like

As socialists we want to soak the rich, and we're realised that to get more money out of them is to cut taxes.

(Not an exact quote but he did cut taxes and this was definately part of his argument. And he was right.)

When I was at school, Britain had a government which put the top rate of tax on some classes of income up to 98 pence in the pound and on remaining types of income to 83%. Did this pay for better public services? Not on your life.

The result was an economic collapse, Britain having to go cap in hand to the International Monetary Fund to beg for loans, savage cuts in public spending and a rash of strikes which left the dead unburied and uncollected rubbish lying in the streets.

And what happened when Maggie Thatcher was elected at the following election and cut the top rates of tax 98 and 83 pence in the pound to 40 pence in the pound?

A few years later a Labour MP tabled a parliamentary question asking how much this had reduced the proportion of tax paid by the wealthiest 1% of the population.

The answer was that the effect over the following five years had actually been to INCREASE both the absolute amount, and the proportion, of tax paid by the wealthiest people.

Because it was no longer necessary for them to send so much of their wealth abroad or employ clever accounting tricks to minimise their income in order to keep more than a tiny proportion of what they were paid, the richest people declared much higher incomes, and actually paid more tax than before.

Those people in the European Union who think it would be a great idea to impose penal taxes on all banks - including the ones who were not responsible for the crash as well as the ones who were - and those people who imagine that the 50% top rate of tax in this country is a good idea, would do well to remember this.

Too much tax on a moble business like banking and financial services will simply push that business abroad. Too much tax on the rich may push them, their money, or both abroad too.

All economically numerate people know that there is a point when increasing taxe rates does not bring in more money. Exactly when this kicks in is a matter of debate. But there are not too many economists or experts who would not agree that when the marginal top rates of tax reach 50% an economy will usually have reached and passed that point.


Jim said…
That is one of the best posts I have ever read on your blog. Very, very well said Chris.

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