Taxing The 'Rich’ May Be Good Politics, But It's Bad Economics

By Janet Daley

At last, the governing class is having a real argument about tax and spending. The trouble is that it’s the wrong argument. Last week, Vince Cable and David Cameron presented us with what appeared to be the outline of a proper debate: set-piece opposing positions, designed to look like the only two possible options for economic recovery. 

Unfortunately, both of these positions rested on a false premise, so they were not so much opening the debate as effectively shutting it down.Mr Cable’s case was tediously identical to Labour’s, which suits his career plans as the prospective Liberal Democrat leader who will lead his party into a Lib-Lab coalition, but has already been repeated so relentlessly by Ed Balls as to have lost any political punch. As briefly as possible, Mr Cable advocated (yawn) more government spending to be financed by more borrowing which, he said (zzzz), was acceptable at a time of recession. The only thing that made this contribution newsworthy was that it was clearly intended to mark the official opening of the Cable campaign to destabilise the Coalition.

The problem with Mr Cameron’s effort, which purported to represent the polar opposite of the Cable/Labour position, was that it was tediously like most of the Tory leadership’s accounts of itself. That is, what was wrong with his speech on the economy (and more important than any quibbles from the Office of Budget Responsibility) was what is wrong with so many of the things that the Cameron team does: it had to serve two purposes. Because all prospective Conservative measures must pass a double test: will they achieve something for the country and (at least as important) will they not reinforce any toxic political image of the party?

So, on the one hand, Mr Cameron claimed to offer a rebuttal to critics of government economic policy on purely practical grounds: a defence of the Conservatives’ chosen strategy for recovery in bold, not-for-turning, Thatcher-like terms. We will not be moved. We will never – not to please anyone – add further to the debt. So there will be no more borrowing to fund stimulus spending, as Cable/Labour recommend, and there will be no more borrowing to fund tax cuts as those on the Right demand.

But, this attempt to create an economic (and moral) equivalence between higher spending and cutting taxes was actually all about the ongoing project of reinventing the party brand. The depiction of tax cuts being just as irresponsible as increased spending, in that they would both have to be funded by “more borrowing”, was not hard-nosed economics at all. It was pure politics. Mr Cameron actually did admit that some tax cuts did not reduce revenue, that they could effectively pay for themselves. But he gave as his only example of this, reducing the highest rate from 50p to 45p. So he defended the headline-grabbing tax cut his Chancellor had already made but was adamant that the principle would not apply to any others. That is just plain wrong – and both the Prime Minister and the Chancellor must know it.

What the economy desperately needs is the genuine stimulus of increased spending power. The attempt to push money into the system by printing more of it has not succeeded in putting spendable cash – and the optimism that goes with it – into people’s hands. Allowing them to keep more of what they earn is the best, and monetarily safest, way to do that. It is true, as Mr Cameron boasted, that the Government has cut income tax for the lower paid. As he said, those on the minimum wage have seen their income tax halved. In terms of social justice and creating incentives to work, this was a truly admirable step. But that is politics, not economics. For meaningful stimulus, it is not the low paid who will make the difference.

I can remember arguing with a very distinguished economist that the tax burden on the poor should be reduced. He accepted that this might be morally desirable but he was adamant that it would have no affect on the wider economy because, he said, the poor do not spend enough to have an impact on overall economic activity. If you want to pull the country out of recession, he said, you must cut taxes for the better off. They are the ones whose consumption will make a difference.

So it may help the Tory image to say that they have halved income tax for the lowest paid, but it is unlikely to do anything to aid recovery. It is those who earn between about £40,000 and £60,000 per year whose decisions about whether to buy a new car or build an extension on the house will be immediately affected by a sudden increase in their take-home pay. They are the spending classes who buy goods and invest in services in large enough numbers to result directly in the growth of businesses and the creation of jobs.

You can see where I’m going with this. What Mr Cameron and Mr Osborne have done to fund their tax cut for the poor is to pull more middle-income earners into the higher-rate tax bracket (and taken away most, or all, of their child benefit to boot). People earning roughly twice the national average wage are now being classified as rich and undeserving. Allowing them to keep more of what they earned would not only be fair (in the true sense of the word) but it would free up some desperately needed disposable wealth so that it could circulate in the economy. Again, Mr Cameron and Mr Osborne must know this. But they are terrified of being seen as friends of the well-off. In parts of the country where £50,000 a year sounds like fabulous wealth, they might be pilloried by Labour as the “same old Tories. So they dare not make the sort of cuts – either to business or personal taxes – which they know would speed the recovery for fear of being called silly names by an opposition who could be blown away by a confident argument in the first place, and by the evidence that would follow from the right measures in an amazingly short time.

And no, I do not believe this paralysis has much to do with the fact of coalition government. Given the Tory leadership’s obsession with rebranding itself as Not The Party of The Well-Off, I am quite sure that they would have done – or not done – precisely the same things if they had governed alone. The same contradictions and ambivalence would have prevailed: they are the party of “aspiration”, but they will penalise anyone whose earnings suggest a degree of success. They believe in low taxes, but only for those with whom they are not afraid to be identified.

The illusion of a heated debate is absurd. Both sides are (deliberately?) missing the point. Tax cuts do not have to be funded by borrowing if they are matched by cuts in government spending.

Where is the party leader with the political nerve to make the economically literate, morally compelling case for less spending and lower taxes? 


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