Wednesday, 7 September 2011

Why I did not sign the 50p tax rate letter

Congratulations to the signatories of a letter to the FT today, asking for the 50p tax rate to be removed to foster growth.  It's the lead on the BBC news and first item on the Today programme.

The authors are all very eminent and have made important contributions to the subject and in public service.  They kindly asked me to sign, but I did not.  Here's why.

1.  They  are likely right that the 50p rate raises little money due to the mobility of workers.  They are also right to point out how skewed the tax take is, which surprises quite a few people: as they say: the rate applies to "just 1 per cent of taxpayers, who already pay 24 per cent of all income taxes".

2. But, as DeAnne Julius acknowledged on the Today programme, the politics of this are dreadful.  One very important point, to me at least, is that the highest (marginal) tax rates are paid by the poor not the rich (IFS, p.146).  The interaction of the tax and benefit system is just catastrophic for those at the bottom.

3.  One thing I think we have learnt from these hideous revelations on the last administration is just how inexpert (all) governments are at making policy (read the example of the £1bn tram to nowhere from John Kay).  Depressingly, I think they need to confine their limited energies and expertise to a small number of big picture items.  On that, the biggest barrier to growth right now, I would suggest, is shortage of demand, to which we should be devoting our limited policy attention.

(4. Finally, I get nervous about writing to the papers since the 364 economists wrote to the Times in 1981 to complain about macroeconomic policy: they were right but the reputation of the subject has unfortunately suffered).

***Update.  The essence of the problem.  In some ways Martin Wolf's piece this morning is even more depressing on what governments can do. He says, rightly, that markets are signalling it's cheap to borrow. Then he says "
"It is inconceivable that creditworthy governments would be unable to earn a return well above their negligible costs of borrowing, by investing in physical and human assets..."
 But we learnt from John Kay on Monday that the Scottish Government spent £1bn on a tram that goes nowhere. So this strikes me as the key problem: how can we get governments to commit to (a) spending borrowed money well and (b) reducing the deficit in the good times?  (Maybe that's a reason for the science budget: its money well spend, and easy to cut?)