Soaking the Rich

I think it would be fair to say that Pete’s favourite business reporter, Robert Peston, is somewhat skeptical of the 50% tax rate:

    What’s more, the IFS says that the Treasury is actually being too optimistic, on the basis of the best economic model of the impact on revenues of tax-rate increases. This model predicts that the Treasury will actually lose money on the new 50% rate, once the reduced harvest from indirect taxes is taken into account.

    Now we’re in the realms of behavioural uncertainty here. But there is a clear implication that if the Treasury simply wanted to raise a big sum of money fast and cleanly, it would have gone for other kinds of tax rises.

    Which in turn implies that the 50% rate is less of an economic necessity and more a return to Labour’s 1980s ideological view of fairness in taxation, that taxing the rich is a good in itself for the way it closes the gap between rich and poor.

    The prime minister insists that New Labour – or Labour reconstructed as a party of financial aspiration which celebrates wealth creation – isn’t dead. But many will say that the budget tells a different story.

A number of points here. Firstly, while the IFS claims to be non partisan it tends to recommend some fairly neoiberal polcies, and while I have no doubt there will be some level of tax evasion by the rich I take the claim that it actually cost money with a rather large pinch of salt. It doesn’t, however, change the substantive point. This will have minimal impact on the deficit that the government is running up. In order to close that type of gap, increases in income tax, VAT or national insurance would likely be needed, and I expect we will see those coming down the line in the short to medium term.

But a return to the battles of the 1980’s? In the first instance, this was a rather crude political move designed for a reaction from the Tories. It definitely had more than that behind it, but claiming it as ideological U turn is pushing it a bit too far for me. Partly, I think this is a necessary setup for the tougher choices down the line. With huge deficits to turn around, there is likely to be calls for solving the problem by soaking the rich. I think those calls could easily extend beyond the left to have a more populist appeal. Well, the rich have been soaked. Perhaps not as bad as they might have been, but none the less they have taken a substantial hit. That will make it easier for a government to propose policies that will adversely impact those in the middle and at the bottom end. Even a future Tory government will benefit from this.

It is also worth recalling that the 50p top rate tax has been floating around for a long time now. There was debate in the Labour Party over whether or not this should be implemented even at the zenith of New Labour. The argument was resolved against introduction in some part due to the idea that these were the fruits of important innovations and greater taxation here could harm the economy, in some part due to a culture that stated that inequality doesn’t really matter. Given what has happened in the past year, both of those assumptions look somewhat shaky and it doesn’t surprise me that the ground has shifted within Labour. But the idea that we could move back to 90% top marginal tax rates, much less the rest of the 1980s Labour programme, seems fanciful, and I suspect that many within Labour would take issue with the idea that any tax rise on the rich automatically equates to abandoning the “politics of aspiration”. It is important to find the right balance, and to ensure that those at the top cannot kick the ladder away behind them.

The whole thing can be read here

  • Zoon Politikon

    http://news.bbc.co.uk/1/hi/northern_ireland/7986582.stm

    That’s start with these people above!

  • Mack

    Kensei –

    perhaps not as bad as they might have been, but none the less they have taken a substantial hit. That will make it easier for a government to propose policies that will adversely impact those in the middle and at the bottom end. Even a future Tory government will benefit from this.

    While this is true – it will make raising taxes lower down the pay scales politically easier, the question still remains is it the right thing to do? There are three ways I can think of in which a deficit can be bridged – tax rises, spending cuts and economic growth (increasing tax revenues faster than government spending).

    Are they choosing the right path?

  • Kensei

    Mack

    Economic growth will not be fast enough to bridge the gap for several years, though it is the long term solution to reducing debt as a percentage of GDP. The problem is essential some fo those financial revenues taht were thought a permanent feature of the environment were not and that excaerbates the structural deficit.

    In the short term that means either spending cuts or tax rises. The numbers we are talking here means you cannot cut spending by those levels without seriously compromising what the modern state is expected to do. Growth in spending has been squeezed and I fully expect cuts to follow. But it won’t close the gap. So expect tax increases as well.

  • Mack

    Kensei –

    They’ve departed from the Keynesian script here (although they were late arrivers to that party) – tax cuts and spending increases would be the stimuli for growth. Is this ideologically driven, or has Britain ‘turned Irish’ ?

  • Kensei

    I think it’s undoubtedly the latter, Mack. The UK never had much room for stimulus in any case (hence the small VAT cut) and now the deficits are so large they are esentially against the wall. The failure of the Treasury Bill sale a little while back was probably a nastier reminded of the limits. Not slashing everything in sight is about the best thye can do.

  • Kensei @ 02:54 PM:

    The “small” VAT cut? Who else even tried it? By the guesstimate that it has already increased retail spending by £9bn+, that’s a fair number of jobs in the retail supply chain. Not all of those jobs, by the way, were in Newry, Derry, Enniskillen and Strabane.

    Next, where did that notion of

    the deficits are so large they are esentially [sic] against the wall

    come from? A more objective judgement is that of last week’s Economist:

    Britain does have one advantage as its borrowing and debt soar. It entered the recession with relatively low levels of public indebtedness compared with other big countries. That means that even with a dramatic surge in liabilities (and these are also rising elsewhere) it will end up with only a middling level of debt compared with G7 countries overall.

    The aim is to avoid the horror of deflation: prices falling so that spending holds back for further price cuts; jobs evaporate, thus creating a vicious spiral.

    The only weapon is “quantitative easing” (which seems to amount to the Bank of England speculatively buying £75bn of equities over this trimester). Even the Daily Telegraph‘s news report last Wednesday was quite sanguine about the results.

    We’ll know it succeeded when the BoE raises interest rates. Meanwhile, we have Mr Machismo Cameron promising that, whatever the furture pain might be, he and his transvestite partner-in-crime, with or without supplementary FemDoms, can magnify it.

  • kensei

    Malcolm

    The “small” VAT cut? Who else even tried it? By the guesstimate that it has already increased retail spending by £9bn+, that’s a fair number of jobs in the retail supply chain. Not all of those jobs, by the way, were in Newry, Derry, Enniskillen and Strabane.

    9bn is peanuts in comparison with the size of the crisis; deficits next year are projected to be in the region of 170bn next year. Sorry, on that scale it is small. They undoubtedly would have liked to do more but were limited by both Europe and threat to Sterling.

    Britain does have one advantage as its borrowing and debt soar. It entered the recession with relatively low levels of public indebtedness compared with other big countries. That means that even with a dramatic surge in liabilities (and these are also rising elsewhere) it will end up with only a middling level of debt compared with G7 countries overall.

    Yes. Ireland was in an even better position before the crisis, but is now wearing a fetching hair shirt. Part of the astonishing nature of this crisis is how fast seemingly well positioned countries have turned around. It is true that even with big increases, the UK will (probably) walk from this crisis with manageable debt. As will the Republic.

    But lets examine the options.

    1. They could attempt to save money
    2. They could keep it as is
    3. They could push the deficits higher and go for a big Keynesian push.

    The Tories propose 1, basically. It does, as you point out, have potentially nasty consequences? Does 3 really seem an option. Markets will buy US debt because the scenario in which the US defaults is roughly akin to the apocalypse: they have the reserve currency. The UK does not and is subject to serious speculative pressure. If three is infeasible, then the debt level is irrelevant: the hand is forced.

    Perhaps I am being harsh here. The Republic is forced in a nasty set of cuts, basically. The UK is probably just forced to the status quo at the moment.

    The aim is to avoid the horror of deflation: prices falling so that spending holds back for further price cuts; jobs evaporate, thus creating a vicious spiral.

    Yes.

    The only weapon is “quantitative easing” (which seems to amount to the Bank of England speculatively buying £75bn of equities over this trimester). Even the Daily Telegraph‘s news report last Wednesday was quite sanguine about the results.

    But no. If we are in a deflationary trap, there is actually no guarantee that simply printing money will actually get us out of it. QE goes a bit beyond that, but we are still not sure if it will work. A lot depends on attitude and expectation.

    We’ll know it succeeded when the BoE raises interest rates. Meanwhile, we have Mr Machismo Cameron promising that, whatever the furture pain might be, he and his transvestite partner-in-crime, with or without supplementary FemDoms, can magnify it.

    The austerity talk worries me; I hope it is simply opposition posturing that will give way to more sense in government. The debt problem may need to be managed, there might even need to be cuts but that needs done in a better environment over the medium to long term.

  • George

    Malcolm Redfellow,
    The “small” VAT cut? Who else even tried it? By the guesstimate that it has already increased retail spending by £9bn+

    That idea will cost the exchequer 12 billion in lost revenues. 90% of British businesses say it has failed to help them.

    That means that even with a dramatic surge in liabilities (and these are also rising elsewhere) it will end up with only a middling level of debt compared with G7 countries overall.

    Britain’s national debt by government estimates is expected to hit 79% of GDP by the end of 2013, the highest in the country’s history.

    The UK has managed the enviable feat of doubling its national debt in the space of three years.

    Some say it’s a train careering out of control but Darling believes everything will be fine and 79% is as high as it will go. After all, the economy will return to growth by the end of 2009 and hit a growth rate of 3% in no time. Fancy that – growth by the end of the year no less.

    Even with this rose-tinted scenario, Britain will need to borrow 600 billion in the next four years. Brown will achieve his golden rule of 40% by 2032 at the earliest.

    As for having a lower debt than the G7 average, Britain is in the unfortunate position of having a public sector that eats up nearly 45% of the country’s wealth, more than even Germany – but without the services of course.

    It is this structural deficit and the permanent hole in the government’s finances caused by the collapse of the financial sector that will have to be addressed.

    Britain can’t afford quantitative easing and Darling’s budget merely put the economy in a downward spiraling holding pattern. After all there’s an election in the next year.