Monday, 4 April 2011

Voodoo logic and the "squeezed middle"

The Tories do a very good job of preserving the myth that a low-tax economy is necessary for enterprise.  I am reminded of Senator Al Franken's comments that the marginal tax rate in 1950s America was around 85% but economic growth still outstripped that of the Reagan/Bush years.  One of the key problems in the UK is that the binary choice model (see FPTP) is posited as the only valid option - so "low taxes" become a worthwhile end in themselves while at the same time there is constant bleating about the quality of public services (incidentally there is a good point to be made, but not the one that the Daily Mail would like you to believe).

Alastair Darling had the right idea with introducing a 50% tax band.  The problem is that the way it is presented is that it is an average rather than a marginal rate.  If you're earning £100,000 per annum, you will probably notice a 10% marginal tax increase rather less than someone earning £10,000. 

The right are hilarious about this - for example the London "Evening Standard" last week ran a story about rail season ticket prices, in which:
a) they positied that some season tickets cost more than servicing a small mortgage; and
b) related them to the UK average earnings figure of £21,000.

A short period of reflection would yield two or three nuggets that take you a bit further than this.  In the case of housing and travel costs they are a trade-off.  If people have worked out that living in Swindon is cheap in comparison to Ealing, then they may want to pay more to travel to put their household budgets into equilibrium.  There is the slight disadvantage of living in Swindon, but if you're only paying a third to a half as much for housing in the first place your disposable income will probably be higher!

Secondly the people who will live that far out are not likely to be on average earnings.  Look at the station car parks and you'll see plenty of planet-destroying 4*4s and company vehicles lined up all day.  So a non-story, which is probably less interesting than the hidden middle-class subsidy of season tickets (more anon).

This leads me to the promotion of delusion that a high marginal rate of tax is somehow a deterrent to entrepreneurialism, innovation and all the things we are supposed to worship in the age of secular fiscal gods.  The number of people affected by this is small - especially when compared to the fiscal drag of frozen or falling margins between the 20% and 40% tax bands.  The readers of the bile-sheets would be forgiven for thinking that this affects everyone and all their earnings.  Boy George will have his work cut out to persuade people that merging employee NICs and income tax doesn't represent a stealth tax.

Spreading ignorance is all very well, but perhaps the time has come for the equity, essential nature and desirability of progressive income taxation to be promoted rather than apologised for.

Next up, some thoughts on public service reform.

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