Vince Cable has a reputation as a competent and distinguished economist. Yet in declaring a redistributive tax policy his “Red Line Issue” within the coalition, he makes not one but two elementary, undergraduate-level howlers, and compounds them together.
Fallacy Number One (the “Static Economy” fallacy): Raising tax rates will inevitably increase Treasury revenues.
Fallacy Number Two: (the “Robin Hood” fallacy): You can eliminate poverty by taking money from the rich and giving it to the poor.
Both these statements are clear and obvious and intuitive. Unfortunately they’re also simplistic and wrong. And they’re distinctively socialist, not liberal, misconceptions.
The Static Economy Fallacy assumes that you can raise tax rates without affecting anything else. But the economy is dynamic: economic players change their behaviour in response to incentives. Raise higher rate taxes, and avoidance and evasion will follow. Some will retire early, or work less overtime, or put expansion plans on hold. Some will hire very clever accountants. They may decide to invest in more favourable tax jurisdictions. International companies will move their headquarters out of the UK, and individual highly-paid high-flying executives will move abroad (as is happening at the moment, with the threat of the 50% tax rate). International investors will move Britain further down their priority list.
Cable must surely know about the Laffer Curve. If you increase tax rates beyond a reasonable and modest level, you rapidly encounter diminishing returns, and very soon negative returns. This may be counter-intuitive, but it has been demonstrated over and over again in dozens of countries in recent decades. Reductions in the higher rate of tax can actually increase government revenues, and promote more rapid growth.
Modest taxes for the well-off obviously benefit higher earners: they also stimulate growth and jobs and investment, and generate vitally-needed employment for those on lower wages. They help everyone. Vince’s “fair taxes” are fair only in the sense that they make all of us, rich and poor alike, worse off.
Then we come to the Robin Hood Fallacy. Of course we are all familiar with stories of lottery winners who have blown millions in short order and ended up back in poverty. And if simply giving money to the poor were the solution, then Africa today should be rich, given the hundreds of millions of aid that have poured in over decades. More generally, just about every variety of socialism has been tried over the last century. The only equality it achieves is equality of misery. The theory of redistribution has been tested to destruction. It just doesn’t work, and there’s no sense in Vince, and the Coalition, trying again one more time.
The solution for poverty (in the UK as in Africa) is work and jobs, and this is being addressed manfully by Iain Duncan Smith. He knows that you solve poverty by getting people into jobs, and he’s determined to create a welfare structure geared to that objective. Work not only overcomes poverty. It creates proper pride and self-confidence and self-reliance, where hand-outs from the tax system only create dependency and hopelessness.
I hope very much that George Osborne will decide to point out to Vince that he as Chancellor sets the UK’s tax policy, and that he understands the Laffer Curve, even if Vince doesn’t. I hope he will also insist on reviewing Labour’s 50% tax legacy – a prime example of a tax that exists purely for presentational reasons, a tax that will not increase revenues, but will suppress growth, investment and jobs. It’s time to put Vince Cable back in his box.
Vince has declared that a redistributive tax policy is a “Red Line Issue” for him in the coalition. It’s also a Red Line Issue for many Conservatives. The problem is, we’re on the other side of Vince’s Red Line.
That great Liberal Prime Minister William Gladstone said that “wealth should be left to fructify in the pockets of the people”. Gladstone was right. Vince Cable is wrong.First seen on ConservativeHome