The Tax Love That Dare Not Speak Its Name

 

 

John McDonnell, the Marxist in the Shadow Cabinet with about as much charisma as a cactus plant, was on The Andrew Marr Show explaining how their excessive tax programs pay for themselves because the revenue they generate will help them break even, therefore creating a value to society. This is wrong, wrong, wrong. As I said the other week, taxes have deadweight costs, roughly to the tune of 30p in every pound. That is, if it costs £1 to provide something in the private sector, it's going to cost something like £1.30 for the equivalent thing in the public sector, which robs society of value.

 

Consider one of Labour's programs to create jobs, costing £10 million a year in salaries. Let's even be generous to McDonnell and suppose that the program manages to generate a profit of £1 million a year. Labour records this as a success and offers it as proof that their job investment program benefits society. Now factor in the 30% deadweight costs of taxation - you'll find that a program with an £11 million return (that is, a £10 million yield + £1 million profit) actually costs £13 million to create due to the financial distortions that come with taxation.

 

The other glaring omission from John McDonnell's medley of myopia is that such programs fail the second test too - that is, they rob society of some of the instances in which people can spend their own money on things that benefit them most.

 

Suppose a mugger waves a knife at you in the street and asks you to hand over your wallet containing £130. After giving it to him, he promises to spend £100 of it on a pair of shoes for you and he'll keep the remaining £30 for himself. Not only are you £30 worse off in terms of opportunity costs, you are also worse off in the fact that you probably didn't want to spend the whole £100 on shoes, and even if you did, the chances are he is not going to pick the same pair you'd buy for yourself with your own money.

 

Our present party leaders are not quite like muggers, they are more like mafia bosses. 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.

  

While government taxation is slightly different to 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 likes of Theresa May and Jeremy Corbyn want to get as much tax out of the electorate as possible without reaching the tipping point of election-losing unpopularity.

 

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 top tax rate, the tax gained from the top 1% is apparently at a record high. The top earners 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. If you want more money to spend on public services, more borrowing isn't the answer, and neither is higher taxes - you have to adopt policies that will generate more income. And in that failure, both main parties are on a mission to become more and more alike in this.