Wednesday, 29 January 2014

Why The Labour Party Is Like The Mafia

When the mafia used to start up protection rackets they had to strike a good economic balance. Suppose they were going to operate in an area with 50 bars and restaurants - how much should they charge the owners for 'protection'? If they charge too little they don't maximise profits, but if they charge too much they might drive the bar and restaurant owners out of business, which means no more revenue.

Sounds charming doesn't it? Well replace the word 'mafia' with the words 'Labour Party', and the words 'protection racket' with 'tax', and the words 'bars and restaurants' with the word 'electorate', and you've pretty much described how Ed Miliband and Ed Balls' Labour Party works with regard to taxation. While this is slightly different from a protection racket in that the benefits from taxation do extend out to taxpayers more than the benefits from 'protection' extend to bar and restaurant owners, the ethos isn't too dissimilar - the two Eds want to get as much tax out of the electorate as possible without reaching the tipping point of election-losing unpopularity.

If parties are not careful this often amounts to a game of cat and mouse between the establishment and the electorate, where the party in power tries to maximise their revenue without extracting so much from the electorate that there is a stasis or unpopularity. In the ways they can't maximise their revenue without being found out they try to maximise their voting potential. So if you're a party-voter, vote with it primarily in mind that if the party comes to power they are going to spend as much of your money as possible - so best look at the kind of things you think they'll spend it on, and how much in each area, and see if they closely match what you would spend it on.

Ed Balls has been behaving a bit like Don Corleone lately with his belief that the more he can extract for government revenue the better things will be. Someone in the Labour Party needs to put him straight.

It is a mistake though to think of the Laffer curve - which looks at the relationship between tax collected and the rates at which they are collected - as determining the rate of taxation that will raise the maximum revenue for the government. That's not what we should think of as the optimal tax rate - the optimal tax rate is the tax that raises the optimum revenue with the fewest negative spillover effects on the economy. To suggest that a healthy tax rate is one that maximises government revenue is like suggesting that a healthy conscription rate is one that maximises the number of soldiers in the armed forces, or that a healthy diet is one that maximises food intake. The true value of a tax rate or an army quantity or a healthy diet is one that proves most effective when considering all effects, not simply getting the most of something we can.

As things stand with the 45p tax rate, the tax gained from the top 1% is apparently at a record high. They earn 13% of the income but now pay 30% cent of income tax collected.  Even the top 0.1% (stress that's nought point one percent, not one percent) pay a comparably astronomical 14% of the total income tax paid, which is an increase by a factor of 140. Even the staunchest redistributionists can't be too unhappy with that, can they?

* Pictures courtesy of viralfilm and left foot forward