It may be, of course, that this will be an X-Factor election, and voters will go for Nick Clegg because of his fresh face and his nice smile. But on the basis that there may be a few punters out there who still rate policies ahead of personalities, it’s worth looking at the Lib-Dems’ tax proposals.
Of course Nick was an East Midlands MEP during my first term (1999/04), so I knew him reasonably well. I even had a chance to debate against him once or twice, and I don’t think I always came second by any means. It’s worth remembering with Nick that his heart remains in Brussels. He is an egregious Europhile, and he aspires to be the nominal Prime Minister of an off-shore province in a country called Europe, governed from the Berlaymont Building.
But I want to think about the Lib-Dems’ tax policies, and (whisper it quietly) I think they’re half-right. It’s the other half which is desperately, disastrously wrong. Nick wants to take millions of low-paid workers out of income tax entirely, by raising the personal allowance to £10,000. Many Conservatives will sympathise with this idea. As Saatchi has argued, it seems absurd that the same low-paid people can be paying tax and receiving benefits at the same time – a sort of money merry-go-round that benefits only the administrators and bureaucrats.
But Clegg also says he wants to pay for his initiative by raising the tax rates on higher earners. He is locked into a “static economy” model, where you can change tax rates without changing anything else. He is blissfully unaware of (or doggedly determined to ignore) the fact that when you change tax rates, you change workers’ incentives and motivation, and therefore you also change behaviour. The economy is not static, but dynamic. Therefore his simple arithmetical sums about the costs of raising thresholds, and the increased revenue from raising higher rates, are simply nonsense.
In fact raising the threshold will be cheaper than he imagines. It would be, at least in part, self-financing. Consider. When we raise the threshold, we raise the real reward from low incomes, and therefore make work more attractive. At the margin, unemployed people will decide to look for a job. Some people in the grey economy, faced now with lower overall tax rates, will go mainstream. Those approaching retirement may decide to work longer. If there is more incentive to work, there is less incentive to claim benefits. More labour market participation, less welfare. A virtuous circle.
The reverse arguments apply if we raise tax rates at the high end. High earners may retire earlier, may relocate abroad, may hire a cleverer accountant. Entrepreneurs may decide not to bother to invest. This is not mere theory. There is a wealth of evidence, from dozens of countries over several decades, that higher tax rates do not raise Treasury revenues, and may actually reduce them.
So in the short term, Clegg’s plan will fail to deliver the revenue he thinks he needs to pay for the higher tax threshold. In the medium term, higher taxes will suppress enterprise, slow growth, and reduce employment and prosperity. Thanks Nick.
The Lib Dems talk about “fair taxation”. I agree we need fair taxation. I agree that the broadest shoulders should carry the heaviest burden, that people who earn twice as much should pay twice as much. But I don’t agree that people who earn twice as much should pay four times as much. That’s not fair. That’s confiscation.
I support the principle of a “flat tax”. That is, beyond a generous personal allowance, everyone should pay exactly the same percentage. Leftists and Lib-Dems call this “tax cuts for the rich”, and they object on ideological grounds. The want to tax the rich to achieve redistribution – but it doesn’t achieve redistribution, it merely destroys wealth. The overwhelming volume of evidence shows that a flat tax is best for growth, best for prosperity, best for investment. Oh yes — and best for government revenues, too.