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.
