Saturday, 27 October 2007

Nobody wants higher taxes

I met a Dane once who introduced me to a new salutation. Every time somebody called for a toast he would raise his glass and say “To world peace and lower taxes”.

Recently this had me thinking. There are people in the world who claim to want higher taxes, but nobody really does. That might seem an odd statement at first (especially if you are Dr. Evan Harris). People constantly call for increases in taxation. The Liberal Democrats themselves called for an extra penny in the pound to pay for education!

But this confuses means and ends. Nobody wants higher taxes, but plenty of people want more public spending (or really, better services) and other want less income inequality (though what they really want is an end to poverty).

Now, one could of course argue that nobody wants lower taxes either. What they want is more freedom; a greater ability to improve their own lives; more control over how they contribute to the common good. But this is not quite true.

There are two ways to skin a cat, as they say at the RSPCA. Better social welfare can be delivered, to use an old metaphor, by increasing the size of the slice or by increasing the size of the cake. So those who claim to want higher taxes could just as easily be satisfied with a bigger economy. By comparison, those who want lower taxes will not get what they really want from a smaller economy; they too would need a larger economy to give them more to spend were taxes stay the same.

Happily, both can be satisfied. Taxes crowd out private investment and spending, so they tend to have a negative impact on the economy. Consequently, whereas reducing taxes will in the long run give both parties what they want (more money for both individual consumption and public welfare), high taxes will in the long run help neither.

So do not be fooled when people say that they want higher taxes. They may say that they do – they may even genuinely believe it – but if you drill down to find what they truly want you will discover that they really are not half as bad as you thought.

5 comments:

Charlotte Gore said...

Well here's something to get you thinking:

Would you rather our economy was competitive on the grounds of tax or low wages?

What about the 7 billion tax burden on smokers? What about the 16 billion tax burden on drinkers? I mean, this is, essentially, the entire disposable income of the least well off getting taken by the Government.

Don't know how you feel about smokers but I certainly have an issue with exploitation of addictive substances for financial gain. Perhaps this is the Labour alternative to mass unemployment as a means of controlling inflation.

Joe Otten said...

There is some truth in what you say, Tom, however, there seems to be an assumption that tax revenue is all pissed away.

In fact much of it is spent on things that will also work to increase the size of the pie: infrastructure and education. Or stop it shrinking: law and order, and defence.

Indirectly all social insurance spending is also a bit like this - it is a bribe to the poor not to support communism, and is good value if it works. (The US, with more natural hostility to communism gets away with a smaller bribe.)

Finally, even if public spending doesn't increase the size of the pie, it might be reasonable to spend it anyway on the basis that the pie in future will be bigger anyway, and the needs of the present are more pressing.

sanbikinoraion said...

Also, people will quite happily vote for greater public spending so long as they don't believe that they will be the ones that have to pay for it.

Matthew Huntbach said...

Haven't you heard? These bigger and bigger cakes we're baking are causing the house to get a bit uncomfortably warm. Plus it looks like we might run out of the ingredients soon ...

Joe Otten said...

Matthew, I refer you here