Sunday, March 18, 2012

History shows that cutting taxes for the wealthy does NOT produce growth

There has been much spinning lately from the Conservative party and the media that the 50% rate is harmful for the economy. The argument goes that getting rid of this – and bringing in a 10% tax cut for those on incomes of over £150,000 – will somehow contribute towards growth.

Historians often accuse politicians of ignoring the lessons of history – and this is another example.

In 1979, the first budget of the Thatcher government saw the top rate reduced from 83% down to 60%. In 1988, the top rate was reduced further to 40%. Now if we are to believe what we are told, these reductions should have brought in a period of growth and prosperity. But, on the contrary, the subsequent years saw the economy sink into recession – the 1980s saw a period of mass unemployment and industrial decline, and the unemployment returned in the early 1990s as a ‘price worth paying’ during another recession.

Now, of course, the top rate being reduced did not cause those economic difficulties – but it does prove the point. A tax cut for the top rate has no effect at all on growth – it simply gives more money to the wealthy. It is exactly what it says on the tin.

I agree however that the 50% tax rate is too high - we can all look forward to the day when it can come down. But that should be at a time of prosperity, once the recession is over, when we can all enjoy tax reductions. That is not the case now. I work in the public sector, where we are in a three year pay freeze, having pensions taken away, and going through redundancies of 20% of our staff. The private sector struggles too.

Who was it who said to make the rich work harder you pay them more and threaten them less, but to make the poor work harder you pay them less and threaten them more?

I must confess I am not so sure about a mansion tax or a tycoon tax, although cracking down on tax avoidance is always morally justified. The 50% rate is simple and straight forward. If there is any spare cash for tax cuts, it should be put towards raising the tax threshold to £10,000, ideally even higher.

If millions of people have more cash, they will spend it and businesses will get the boost they need. Raising the tax threshold is the ultimate pro-growth measure.

There are of course other pro-growth measures which can be considered – even Labour’s idea of a National Insurance holiday should be looked at. But I am not convinced that being Robin Hood in reverse will help the economy.

Now where does that leave the Liberal Democrats? We can’t blame the Tories for wanting to protect privilege, help the wealthy and privatise public services – after all, that is why they are here. But it does leave us in a difficult position.

Fairness of taxation was one of our four main manifesto pledges – it is at the top on the front cover. It was also our most popular policy. So it does concern me if we are abandoning this. The argument that we have closed tax loopholes won’t fool anyone. The wealthy will just find a tax loophole somewhere else and people know that.

To be honest, I don’t have the answer. We have gained much from the coalition to help people and modernise our politics – I have outlined many of these in previous entries – and when I read angry comments on Conservative Home and in the Daily Telegraph then I know we must be on the right lines. It would be a shame to lose these benefits by the risk of allowing a pure Tory government to run free.

Let’s hope it is all media speculation and see what George says this week. We may be pleasantly surprised.

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