Too Much Spending, or Not Enough Tax?

The two views, broadly about what’s wrong with the UK fiscal position are what I would characterise as the “right-wing” position: The Labour party spent too much in power, believing the tax from the Banks would continue indefinitely. When the wheel came off the economy, tax receipts dried up, and the deficit-financed spending looked insanely unaffordable. I’ve been saying this since 2005.

The left, on the other hand, cannot see any fault in their beloved state. In their view, if only the wicked rich people would willingly cough up 50 or 60% of their incomes (a “fair share”) then all the lovely state spending would be affordable. From this develops a nasty attitude where people are blamed for using absolutely legal tax planning to minimise their bills. The biggest “relief” claimed by “the Rich” accounting for the “tax gap” (defined as the difference between the headline rate and the paid rate) is the ability to carry forward losses.

It’s important to see exactly where most of this comes from. Most high-rate tax-payers are not on PAYE. They’re company directors, and have a great deal of control over their income: how and when it’s paid. Many of these are personally liable for the debts of the firm they run. One of the commonest forms of start-up finance for businesses is an extension on the family Mortgage. The investment in a business often involves spending huge sums, borrowing against future earnings. This, in accounting terms, takes the form of years of losses. These are then carried forward into subsequent, profitable tax years. This is why debt interest is taken out before the profit line. It means that new, growing companies, from which a large portion of job creation comes, face low tax-bills despite high operating profits.

This is not abuse, in any way, shape or form. This is the tax system doing EXACTLY what it is designed to do. Howling down entrepreneurs for apparently low tax bills will result in lower employment growth as people decide at the margin to stay in PAYE employment, rather than take the plunge, extend the mortgage, and start up a company.

The left believe themselves to be moral, seeing state spending as a form of charity. It isn’t. The problem is that high state spending doesn’t in the long-run lead to better outcomes. It doesn’t even seem to be correlated particularly strongly with equality. There are other, much stronger correlations with equality.

There is no doubt that there are too many reliefs, and that a flatter, simpler tax system may well raise more money from “the rich”. But it’s important to not, for reasons of envy and spite, take a knife to the Golden Goose. The left’s obsession with high marginal tax rates is one of these idiocies. Of course the right has idiocies too – the obsession with tax-cuts over fiscal stability is merely the other cheek of the same arse. Likewise the twin obsessions with Tax dodging (left) and benefits cheating (right). Of course, if the benefits system is too complicated (and it is) people will seek to retain benefits while taking casual work. If the marginal tax rate is too high (and it is – over 100% for some low-waged workers) people will avoid paying it.

There’s an argument about where the peak of the Laffer curve is, but both sides seem to be sold on the notion that the peak of the Laffer curve is where we should be targeting tax rates, as if the whole purpose of the economy is to generate Government revenues. They are just disagreeing about where the peak is (40-45% right, 60-70% left).

There’s an argument about what the correct level of redistribution is. I can be persuaded that because so much of one’s earnings can be predicted by where and to whom you were born, redistribution should form a significant part of government spending. These aren’t particularly important.

The aim of a tax system is, as Jean Baptiste Colbert remarked “The art of taxation consists in so plucking the goose as to get the most feathers with the least hissing.”. There is a limit to how many feathers can be got from the goose. And we’re there. The rich simply won’t pay any more than they are. The poor are already over-taxed, but simply have less power to avoid it. The British economy, an abnormally open and international one, is nearly 50% state, and over 40% tax. Everyone must (and broadly do) simply accept the state cannot grow any more.

The other way to reduce the hissing is to make the taxes low, simple, universal and fair. Often, in New Zealand and the UK in the 80’s cutting tax rates has released more revenue as the marginal price of avoidance falls. High marginal tax rates are distorting, especially on the lowest paid. And the benefits system must be constructed with an eye to the incentives. Clearly to my mind the British tax and benefits system does none of these things.

Spending must fall, but it must fall gradually, leading to the left’s headbanging bleating about cuts, but also upsetting the idiot right with their bleats of “continuity Gordon Brown”. Of course, Osborne is cutting spending as fast as he can, raising as much tax as possible to balance the books. He’s simplifying the welfare state, flattening taxes. Allied to market reforms in Health and Education, this is a Government which is doing most of the right things.

Where they fail is in giving in to Labour’s spiteful anti-rich rhetoric. The Conservatives must unashamedly stand up for the wealth creators, and the elements of the tax system which benefit them, without which there simply would be no point to the enormous risks most business owners face when they start out. Carrying forward losses is NOT abuse, and should not be limited. Osborne missed an opportunity to stand up for the people he needs to employ the vast army of unemployed. This lack of courage, not policy, not the brute business cycle is what will cost the Tories the next election.

The people don’t LIKE the Conservatives, they never have. But they do RESPECT the conservatives when AND ONLY WHEN they’re doing what Conservatives know (and the people know, in their deep subconscious) to be right. Thatcher’s appeal wasn’t in being right, though she often was, but in acting with conviction. Balanced books, restrained state spending, and support for the motor of the economy, Business, are conservative values. Doing what’s right (but uncomfortable in the short-term) while appeasing the siren calls of class envy merely looks like Janus-faced, lilly-livered lack of moral fibre.

7 replies
  1. selsey.steve
    selsey.steve says:

    Look at Hong Kong to see the Tax Man in operation, in support of Government income:
    Companies pay a standard rate of 16.5% on assessable profits.
    Businesses other than corporate entities pay a rate of 15% on assessable profits.
    Personal Income Tax is payable at a maximum rate of 15%. I worked in HK for many years and was very well paid but my income tax never went above 12.5%.
    The HK Government has, this tax year, given HK$6,000 back to each and every HK tax payer with a bank account in HK!
    That is how tax should work.

  2. Julian
    Julian says:

    Your argument only makes sense if most high earners are in fact entrepreneurs and company directors. My children have been through an independent education and their friends' parents form the bulk of the higher paid people I know. Some are struggling to pay school fees on two salaries. Most of the rest work in the City or are in high up positions in very large corporations. Plus a smattering of doctors, vets, lawyers etc. i.e. Very few are the risk takers you think are being taxed too highly.

    The real issue is not the marginal tax rate, as you rightly say. It's that many people are able to configure their tax affairs so as to pay half the rate of middle income earners when they aren't taking real business risks or starting new businesses. This seems to be what Osborne discovered with his recent look at some tax returns.

    I don't like paying 40% tax plus National Insurance but I like it a good deal less if people earning ten times what I do are paying 15%.

  3. Mark
    Mark says:

    The purpose of taxation isn't to raise revenue for spending but to reduce the consumption or control of real resources. The only way that taxation on the rich can fund handouts to the poor is if there is a shortage of the things which poor people need, due to overconsumption by the rich.(mismanagement might be another issue)
    On the other hand, reducing government spending for the sake of it – to save money- doesn't make much sense either, especially from the perspective of the rich – taxation on the rich is due to jealousy and this will only increase if people find themselves in a degraded and fearful condition.

    As for wealth creators – I think that the potential benefits to production and society from harnessing high status seeking (as opposed to people seeking a normal status) are exaggerated here – for the most part the market just keeps high status seekers from causing trouble – let the baby have it's bottle is the best argument here.
    There is though, a danger in a society which views (high) status seeking as a good thing, because not everyone can have it.

  4. Simon Jester
    Simon Jester says:

    The comment by "Mark" is such a pile of drivel that I would assume it had been made by a spambot, were it not for the fact that I can't see what the 'bot is trying to sell.

  5. Malcolm Bracken
    Malcolm Bracken says:

    Mark's been reading darwin economics, my review of which is here.

    Of course without high status-seeking individuals, our Homo erectus ancestors wouldn't have bothered to find out what's over the hill, and we'd be an extinct primate species which briefly flourished in the Rift Valley.

    People like Mark are empty consumers, with no inclination or wit to improve the lot of mankind, instead being content to stand on the shoulders of Giants and admire the view, rather than climb higher.

  6. Mark
    Mark says:

    Which part didn't you understand Simon?

    Jackart –
    I think you are confusing status seeking for curiosity or any number of other drives which humans possess. You could only gain status for travelling over a hill if society had already decided it was a good thing to do. And society would only decide it was a good thing for you to travel over a hill to an unknown land if they didn't like you very much.

    I mean, do really useful people do things for status? How do you explain scientists/stockbrokers? What percentage of inventions have come about as a result of status seeking as opposed to a desire to create? Don't we need corporate ladders to distract cold blooded but useless status hunters?

    Having said that, I'm sure your non-existent static electricity motor was invented purely for the sake of status…

  7. SadButMadLad
    SadButMadLad says:

    "“The art of taxation consists in so plucking the goose as to get the most feathers with the least hissing.”. There is a limit to how many feathers can be got from the goose."

    A nice description of the Laffer Curve.


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