Pity the rich

22 November 2005

The usual suspects have taken over tehgrauniad letters column. Andy Mayer has an interesting argument: It is regrettable that Charles Kennedy has not yet seen the light on the 50p tax rate (Kennedy plans policy shift on taxation to woo floating voters, November 19). Aside from the usual arguments about taxing aspiration there is the…

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James Graham

musings

The usual suspects have taken over tehgrauniad letters column.

Andy Mayer has an interesting argument:

It is regrettable that Charles Kennedy has not yet seen the light on the 50p tax rate (Kennedy plans policy shift on taxation to woo floating voters, November 19). Aside from the usual arguments about taxing aspiration there is the point that those earning Â£100, 000 or more are those most able to influence their own remuneration. On the day after this policy is implemented they will have been hit by a tax rise of up to Â£1,000 for every Â£10,000 over Â£100,000 they own. They will demand or execute wage rises that compensate them for the tax rise. Those rises will be extremely disproportionate because for every additional Â£1 rise, there will be 50p going to the government. So far from contributing to social justice, the 50p rate makes inequality even worse.

Mayer here is taking the opposite view of Tony Blair, in that he claims that the 50p rate will increase tax revenues, not lower them. Personally, I’m a little sceptical however, for the simple fact that someone who has that degree of control over their own earnings will surely have already paid themselves as much as they believe they can possibly get away with. But he is right in so far as it is true that income tax is inflationary.

But please. Spare me this guff about about taxing aspiration. Few people aspire to incomes above Â£100,000, and we aren’t talking about 1960s style super-tax here. If you’re worried about taxing aspiration look at the other end of the scale. If the Tax Commission does its job properly, then the revenue raised by the 50p rate will be committed to flattening exactly that.

Liberal-Democrat-Policy-Consultations liberal-democrats tax-commission

Comments

13 responses to “Pity the rich”

22 November 2005

Valerie

You and Andy both make good points, but Gareth’s is the most pertinent!

I’m an opponent of the 50% rate, but I also fail to see why the ‘aspiration’ argument gets much play
(and as you say, it’s relevant to the other end of the scale too).

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22 November 2005

James

You and Andy both make good points, but Garethâ€™s is the most pertinent!

Amen to that.

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22 November 2005

Neil

The aspirations argument is very silly. The degree of aspiration amongst the many millions earning Â£20K to raise their income to Â£25K is far greater than those aspiring to raise their income from Â£95K to Â£100K. Why do those who attack progressive taxation beleive that it is only the very high earners who have aspirations? and while we’re at it, why do they insist on describing high incomes as ‘middle incomes’?

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23 November 2005

Tim Worstall

Iâ€™m always annoyed by the concentration on tax rates at the top. To my mind the real scandal is that someone working 29 hours a week on minimum wage faces a 30% marginal tax rate. (NI plus income tax). What on earth is someone so far down the income scale doing paying tax? Double or even triple the personal allowance so that the poor donâ€™t get anywhere near the income tax system. Yes, it will mean a severe loss of revenue but taxing low incomes to pay for, say, the Royal Opera House is not fair in any way that I understand the word.

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23 November 2005

Andy Mayer

I’m afraid the Guardian version of the letter was heavily cut, full version below. There are two further points not in the letter and then on James’s comments above. The first is that the tax creates deadweight loss in the public sector. When National Insurance rose in mean much of the money earmarked for more teachers was wasted on the NI costs on higher salaries. This will have the same effect on senior public servants, judges etc. The second is that the tax burden is predicted to go up to 44% next year, public opinion is likely to move heavily against tax rises with this rate of change

Thirdly the tax on aspiration is not guff nor do I argue the tax take will go up, other than in the short term, it couldn’t fail to. The issue in the long run is what effect tax rises and tax complexity have on overall prosperity and human behavoiur. High-tax, high-spending countries have a poorer record of economic growth than low-tax, low-spending countries. This matters as the size of the whole pot is what ultimately determines the tax take. On human behaviour the power of high income earners to set their own pay is one, I feel killer argument against this policy, the second is the mudane point that it increases long-run tax avoidance.

Raising allowances is a great idea socially and economically, we can agree on that, the 50p rate is divisive, I can’t support something that is both socially unjust and economically harmful.

Original Letter….
Charles Kennedy’s commitment to not raise the overall level of taxation while retaining a commitment to make the existing structure more fair is welcome. Taxes have risen from 35% of GDP in 1997 to near 42% of GDP today under Labour and may well continue to rise as we count the cost of Gordon Brown’s off-balance sheet accounting, public sector pensions cowardice and unproductive wage rises.

It is regrettable that Charles has not yet seen the light on the 50p tax rate. In the Liberal Democrats we share the desire to make the tax system more proportional where possible to achieve a more equitable contribution to the price of living in a decent society. Moves to raise allowances on the lowest incomes are a good way of doing this, everyone benefits, particularly the poorest. Moves to raise the top rate of tax on the super-rich will be counter-productive.

Aside from the usual arguments about taxing aspiration and success there is the simple point that those earning Â£100k or more are those in society most able to influence their own remuneration. On the day after this policy is implemented said group will have been hit by a tax rise of up to Â£1,000 for every Â£10,000 over Â£100,000 they own. Will they take this lying down, of course not. What will happen is that that said group will demand or execute wage rises that compensate them for the tax rise. Those rises will be extremely disproportionate because for every additional Â£1 of rise, there will be 50p going to the government. That money in turn will come from the general pool of finance available for wage rises across entire companies and industries. We see this already in the way higher rate 40p tax payers negotiate their pay. It’s the post-tax percentage rise that matters to individuals not the pre-tax lump-sum.

What this then means is that the 50p rate, far from contributing to social justice, makes inequality even worse while in the long-term damaging prosperity and the tax-base. It’s a lose-lose policy and it’s one we should ditch at the earliest opportunity. Being compassionate and concerned about inequality should not make one blind to the economic realities of human behaviour.

——————
Re Gareth’s letter, Charles was being made to look ridiculous by the press for refusing to express an opinion on this issue. The purpose of leaders is to lead. That he has done so is broadly welcome. The Chairman Charlie routine was cutting little ice with the public even it made the Federal Executive happy. In substance it also means that when we do come to vote on this the party has some idea of whether the position they take is going to be warmly welcomed by the leadership. I don’t see how that can be seen as a bad thing. The public care markedly more about the opinions of the people they elect to represent them than those elected by local Lib Dem branches to represent them at conference.

The problem I have with Gareth’s activistocracy arguments is that he appears to suggest that the Lib Dems representative democracy should trump parliamentary democracy. I don’t see how that can help the party develop good popular and robust policies that keep up with the public debate.

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23 November 2005

James

The tax avoidence argument is a far stronger argument than the argument that high earners will simply award themselves more. As I say, this ignores the fact that they are already awarding them the most they can get away with in the first place.

You say that the aspiration argument isn’t guff, and then fail to provide a single bit of evidence to advance your claim.

Finally, Gareth wasn’t arguing for “activistocracy” – he was arguing for the Tax Commission, established by Kennedy himself, to be allowed to make its own conclusions. As it happens, it isn’t an FE issue, it’s an FPC issue, which has the authority to make interim policy.

It is a fairly elemental matter to respect the various checks and balances within the party structure. When people do, they usually get what they want. When people don’t, it invariably stores up problems in the long run.

Ultimately though, “activistocracy” is something that all parties have to deal with. Activists have a nasty habit of voting with their feet, something which has become all too apparent within the Labour party.

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23 November 2005

Gareth

It really is reverse spin to try and call a 50p top tax rate ‘socially unjust’ and exactly the sort of argument that runs counter to what I and others would describe as ‘fairness’. James is right – the tax avoidance issue has to be managed. Others are also right in pointing out that it’s a silly and irrelevant micro-debate.

As ever, Andy Mayer makes wild accusations without any evidence – and I see he’s at it again. I’m unaware of any particular journalists ripping Charles to shreads on tax – or even bothering to ask. ‘Activistocracy’, uh, well that must be a new term for ‘abiding by the constitution’.

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23 November 2005

James

Just to be clear about my own position here, I remain an income tax sceptic and would love to see the party adopt a line on, eg, LVT that would warrent me to support the scrapping of the top rate income tax policy, but I don’t believe that’s going to happen.

I DO however support the idea, as I said earlier, that if we have LIT it should be levied on all incomes. In the last GE, when we were advocating an average LIT of 3.5p, we should have talked about a top rate of, eg. 46p. If we go for LIT at a higher rate, we should reduce the top rate (indeed, all rates) accordingly.

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23 November 2005

Andy Mayer

Hi James, Gazza,

> Higher earners

I’m sure they are paying themselves as much as possible at the moment. Every year however a pool of money is made available for wage rises within most organisations. The social justice issue is how that gets shared out and what influences that decision. The issue with the 50p rate is that it creates a further incentive on top of the 40p rate for unequal distribution. People’s salary demands depend on post-tax not pre-tax wages, in part why you see a small acceleration of unequal wage claims where the top current rate kicks in. The primary difference between the targets of the current top rate and the proposed super-rate is their wage-bargaining power. I think dismissing that as irrelevant is a tad nieve.

> Evidence/aspiration

Sorry I thought I made it clear that the aspiration argument is the flipside of the propserity argument based on the relationship between growth and tax. Lower growth is generally a sign of lower aspiration to work, innovate, build business etc. There’s a good report on the exact stats on the Reform website http://www.reform.co.uk/filestore/pdf/negativeimpact.pdf

> FPC

I’m probably nieve myself about the constitutional significance of what the FPC can and cannot do. All I can note is that it strikes me as odd to complain that the elected leader of a party is making their views clear. I don’t see how it changes the power of the tax commission to make their own decisions if they disagree with leader other than making it politically more difficult, which in itself is no bad thing. The leader has to respond to the public debate as well as keep the party happy and the party’s decision-making structures are arguably not nearly flexible enough to facilitate both. I also agree that if the parliamentary party start to diverge wildly from the party in the country they will reap the cost of that in terms of falling support, membership and activism. That is though a risk they must be prepared to take at times when the party in the country diverge wildly from the public in a way they believe will harm their electoral survival.

> Fairness

Fair point, but fairness is something the party has allowed to drift to mean pretty much anything from across the social justice spectrum. I’m reviewing this in a paper at the moment. But for a quick summary Fairness has been used and can mean
– Equity (equal treatment, usually by the law) – we all agree about this
– Equality of outcomes – we don’t support this but talk about some unequal oucomes like life expectancy as though we do
– Equality of opportunity – largely informs our education thinking, but at an absolute level means the same as equality of outcomes
– Equality of access to opportunity – A more honest interpretation of the above suggesting we support equal access to some opportunities e.g. a good local school, casulty services etc.
– Access to good opportunity – A, in my view even more honest appraisal given equality of access to opportunity itself can never be achieved in the public (or privately run) services, services will always variable, mutli-tier according to the variability of the people who run them. Good access is a reflection of the Churchill view that we seek to raise up poverty not drag down wealth, we seek to help people achieve their potential not drag down people who do it faster than others etc…

The fairness point on tax is that proportionality is broadly more fair than either regressive or progressive taxation. Both are placing an unfair or disproportionate burden on one part of the population. The progressivity of the 50p rate is justified by the regressivity of the general tax burden, but that is in itself an unconvincing argument. Firstly a tax on 1% of the population when our argument about the tax burden is based on the difference between the top 20% versus the bottom 20% is clearly not really addressing the problem. If we really believed this was relevant we’d be proposing a rise in the 40p rate not a new rate. Second a large part of the regressivity of the tax burden comes from taxes deliberately designed to be unfair to change behaviour, sin and environment taxes for example. Linking the two together to support higher income taxes on the wealthly on social justice grounds is arguing the rich should subsidise smoking and drinking. I do though have some sympathy for James’s suggestion of linking rises in sin taxes to the allowance. That at least helps the least well off and leaves them with the choice over how to spend the dividend.

What’s your fairness case?

> Spin & wild acusations

On this occasion I appear to have been wildly accused of making wild accusations. If you haven’t seen the press attacking Charles for his Chairman style of leadership you really must have been asleep during conference.

Reply
25 November 2005

James

I’ll give you one thing Andy; you’re right about the inconsistency about this policy and not advocating a rise in the 40p rate.

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27 November 2005

Matthew

I love how that Reform report excludes Japan, apparently because it doesn’t fit in with the conclusion they want.

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27 November 2005

Matthew

On Andy Mayer’s argument about the rich awarding themselves pay rises to offset tax, I’d note that this flies in the face of other arguments
about tax and incentives to work, as the measure of productivity in this country is how much income a person gets, so Mayer’s argument
implies the higher the income tax the greater productivity.

In reality however it seems this is not what happens. The higher rate of income tax fell steadily throughout the Thatcher years (though I note
she coped with a rate 60% or higher for 9 years of her premiership) and oddly the income of those paying it rose faster than ever.

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29 November 2005

Andy Mayer

Matthew, I think you’ve made a slight error

Productivity is measured on output per worker not income per worker.
http://www.statistics.gov.uk/cci/nugget.asp?id=132
Output is turnover of the company not the wage bill. The likely effect of higher taxes on turnover depends on the industry. Generally though they raise the cost-base of the business, making that business less competitive if they have to deal for example with foreign competition or black market rivalry within their own market. This is likely to reduce turnover which, assuming the same number of employees would reduce productivity.

Raising wage taxes though also has another effect in the long-run, it encourages firms to invest in capital rather than people. This can reduce the payroll overall and increase productivity. This though at the expense of higher unemployment which carries huge long-term social costs, e.g. France and Germany. Net it’s hard to say what effect high rates of income tax have on measured productivity, but if you treat unemployment as zero productivity the picture is largely negative.

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