One of the most pernicious and durable errors in politics is the idea that politicians, in their hubris, and hiding in the Westminster bubble, can make any changes that occur to them, cooked up on the back of an envelope after a good dinner, and nothing else will change. There will be no unintended consequences or perverse incentives.
And sadly, this leads to headlines that are superficially appealing to the electorate. Freeze energy prices. Raise taxes on the rich. Bash the bankers. Too many people are prepared to applaud, even though these actions will make them poorer and may cost them their jobs.
“Let’s raise taxes on the rich”. The Greens have announced that they want to raise the top rate of income tax to 60%. Labour wants to reinstate the 50% rate. And many voters, knowing that these changes won’t hit them, approve. Let the rich pay. Let the broadest backs carry the heaviest burdens – despite the fact that those on higher incomes already pay disproportionately more tax than the rest of us. But back in the real world, the evidence from many countries over decades shows that punitive taxes on high earners impact negatively on revenues. These people may work less, or retire earlier, or put less effort into their business and more into tax avoidance. Or they may decide not to bother with a new investment. And in many cases, the rich and mobile will simply move abroad to a more wealth-friendly environment. The key lesson, counter-intuitive though it may be: high taxes on the rich mean fewer jobs for the poor.
Then there’s the mansion tax. It will distort the market. It will primarily make London and the South east, the greatest motor of the UK economy, less attractive to investors. Even the threat of it is already affecting prices of more expensive properties – reducing the postulated tax base. It would arguably make the tax system too progressive (especially taken with the higher income tax rates mentioned above); it would not be related to the individual’s ability to pay (e.g. elderly people who are property-rich but cash-poor); and it could have substantial disincentive effects. Yet both Labour and the Lib-Dems favour some variety of mansion tax.
Non-Dom status: Labour proposes to scrap non-dom status. Ed Miliband has claimed that the move will raise millions (despite the fact that non-doms already contributed £8.2 billion to GMRC in 2012/13). He seems to think that the non-doms will take the hit lying down, and ignores the fact that they can go elsewhere – as many will. Many economic commentators – and even Ed Balls himself – have suggested that scrapping non-dom status will not raise revenue, but will cost the Treasury money. There are issues regarding the inherited nature of non-dom status that need to be addressed, but simply scrapping the scheme would do more harm than good.
All three of the above proposals are politically motivated, knee-jerk, “bash-the-rich” ideas. But the rich won’t stay around to be bashed. They’ll go elsewhere, and they’ll be made very welcome in other jurisdictions – just as thousands of French business people came to London to escape President Hollande’s punitive taxes. Labour and the Greens are deliberately hanging up a “Britain Is Closed for Business” sign, and those who suffer will include ordinary working people who will be affected by the loss of jobs and growth.
The Death Tax: David Cameron has said that he will raise thresholds to take family homes out of inheritance tax. But he adds “It’s right that we as a nation have an inheritance tax”. We say it’s wrong. We pay tax when we earn; we pay tax when we spend. It’s morally indefensible that the same money should be taxed a third time when we die. But again, the false assumption of “No knock-on effects” kicks in. The media are reporting the cost of the Tory initiative at £1 billion a year. But pause and consider: A reduction in the death tax means that more family businesses will survive, and will be more likely to invest and grow and create jobs. Money in the pockets of beneficiaries may be invested. Or it may be spent – incurring VAT. If spent, it will increase consumer spending, enhancing growth and employment. It’s difficult to estimate the exact amount, but the claimed £1 billion cost of reduced inheritance tax will be partly, or largely, offset by money that is left to “fructify in the pockets of the people” (as Gladstone put it).
Miliband’s energy price freeze: The Labour promise of an energy price freeze has already had the effect of keeping prices higher than they would otherwise have been, as utility companies struggle to maintain the highest possible start point for the proposed freeze. But government interference in market pricing mechanisms almost always has profoundly negative consequences. It can drive operators out of the business, and clear goods off the shelves (as we saw in Soviet Russia). And it is particularly pernicious in the energy market. We desperately need new energy infrastructure investment. But who will invest in a market subject to these draconian interventions? Already the massive regulatory uncertainty in the market has resulted in an excessive strike price at the new Hinkley C nuclear power station. Miliband’s price freeze will block investment entirely – and put supplies under further threat. If I may paraphrase the Miliband policy: “You can have cheaper prices on any energy that’s not available”.
Cutting emissions: We have an elaborate programme of green energy policies designed to cut emissions. It originated in Brussels, but was enthusiastically endorsed by Ed Milband, no less, when Secretary of State for Energy. He carries the personal responsibility for the 2008 Climate Change Act, perhaps the most damaging piece of legislation this country has ever seen. But the effect of the policy is to drive energy-intensive businesses out of the EU altogether, often to jurisdictions with lower environmental standards. A DECC report confirms that in one industry, petroleum refining, imported products imply 35% higher emissions than if refined in the UK. Anecdotal evidence suggests that a ton of steel refined in Shanghai involves double the emissions of a ton of steel in Sheffield. It takes a genius like Ed Davey to devise a policy that not only undermines competitiveness but also arguably increases global emissions.
Labour claims that “every policy proposal has been costed”. But you can bet they never costed the inevitable but unintended consequences.