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Below Average Thinking on Tax?


Inspiration for what I blog about comes from all sorts of places. With the luxury of representing myself rather than trying to carve out a niche, you get to observeĀ  my mental hoard of shiny things, intriguing things and things that make me want to shout at the radio. Today is one of the latter. I heard Nick Boles, Skills Minister in the Government, being interviewed on Radio 4’s Today programme. This week’s controversy has been the extent to which Prime Minister David Cameron has benefited from tax avoidance schemes. Boles was at pains to distract, painting a picture of Cameron respecting the memory of his father (the one who owned the offshore account) as any ordinary person has a right to do, insisting that all due taxes on income from the account had been paid and then, as an additional gambit, insisting that actually the rich were paying more of the country’s tax bill under the Conservatives than under any previous government.

Really? I would have liked the interviewer to have challenged that more strongly although, to be fair, it wasn’t the subject Boles was being quizzed about. It struck me as a claim that might be the result of the same kind of below-average reasoning that made me write another ‘shout at the radio’ post last year, on wages. Is this a factual fact or a wishful ‘fact’ and, if it is the former, does it really stem from the Conservatives being simply wizard at running the economy?

Since the Conservative party clearly haven’t reduced the tax burden on low earners or increased it on the rich (lets assume they mean top rate tax payers), either they have increased the number of rich people or increased the inequality between the income of the richest and poorest. It could be both but I think the latter is the stronger factor. The proportion of tax revenue from the rich could increase while still leaving them with more than enough for their wants and needs and without the poorer parts of society feeling better off. In fact, there are clearly large numbers of people who feel much worse off, such as the disabled, who recently had their benefits slashed and are further away than ever from contributing to tax income.

There is an argument, as mentioned in this Spectator article from last year, that lower tax rates lead to higher tax yields. Digging a bit deeper, this seems to be based on an economic theory called the Laffer curve. However, some of that depends on the fact that rich people get clever about hiding money from the tax authorities as well as well as the disincentive to seek stratospheric incomes when you only keep a small proportion of that. It doesn’t necessarily mean that a lower tax income is a social evil and it is an unwarranted assumption that the curve is neatly balanced around the 50% mark. A reference to the New Palgrave Dictionary of Economics (2008) suggests that most economists understand the curve as being asymmetric with the highest point at around 70% tax for top earners.

The next UK General Election is a long way off but I’ll be looking for parties who are willing to raise taxes, particularly at the top end of the curve.

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