Saturday, March 24, 2007

Gordon Brown's Taxes are not 'Easy'

Julia Langdon, of the Daily Telegraph, writes under the heading: “2p won't buy Brown a ticket to No 10” (a reference to Gordon Brown’s budget speech this week announcing a cut of 2p in the standard rate of income tax).

“The clues were all there. Gordon Brown has laid them himself over the past few years, during which acute observers will recall that he has consistently sought to reclaim the considerable reputation of the philosopher Adam Smith - Margaret Thatcher's favourite economist - as a bulwark for his "New Labour" economics.
It is, of course, a wonderfully appropriate claim for him to make, not only because of their shared enthusiasm for prudence and a strong sense of the importance of what Smith called "moral sentiments", but only because of the pleasing symmetry provided by their shared home town of Kirkcaldy in Fife. Mr Brown is a skilful politician, as we all know, and, despite his clumsiness in anything to do with public relations, he still has an ability to spot a gifthorse when it comes cantering towards him at breakneck speed.

Thus he embarked some while ago on rescuing his distinguished former fellow citizen from the clutches of the political opposition. At one point, when being a member of "New Labour" was something that people still boasted about, he claimed that Adam Smith was a spiritual early member of "New Labour". In a lecture at the University of Edinburgh five years ago, he specifically refuted the idea that Smith's belief in the free market made him an exclusive Conservative hero. He has associated his own name with that of the annual Adam Smith lecture. Last year, the Governor of the Bank of England found himself making the long trek north for the same reason. And this month he put the man's face on the £20 note.

What other clues did we need, for heaven's sake, that in preparation for his life after the Treasury, Gordon Brown may have been reading a bit of Adam Smith and contemplating his philosophy and might even be considering a cut in income tax?
"Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice; all the rest being brought about by the natural course of things," wrote Smith in his Essays on Philosophical Subjects

So there you have it. Easy taxes is what everyone wants. While Mr Brown's main objective in what surely must have been his last Budget - under what circumstances would he remain as Chancellor if he does not, after all, become Prime Minister later this year? - was to keep a careful control on the Exchequer, he also wanted to please as many people as possible and simultaneously confound his enemies.”

I have a few quarrels with Julia Langdon in her interpretation of Adam Smith’s 1755 paper defending himself against charges of plagiarism. I think the notion of a standard tax rate of 20 pence in the pound could hardly be described as ‘easy taxes’, especially as the top rate is 40 pence with an 11 pence in the pound National Insurance ‘tax’ added to the charge, plus all the other taxes, such a Value Added Tax, Stamp Duty, television licenses, car duties, petrol taxes, inheritance taxes and many ‘stealth taxes’ that Gordon has imposed in his ten years as Chancellor of the Exchequer.

And set against the reduction of the standard rate from 22 pence to 20 pence, we have to take account of the abolition of the old 10 pence starting band, which moves millions of low paid employees straight into the 20 pence band. What Gordon giveth, Gordon takes back (and as a good Church of Scotland member, Gordon knoweth his Bible).

Smith would have taken the whole picture into account and not just the headline spin. He would also have been somewhat surprised to see public expenditure above 40 per cent of GDP, a sharp rise from nearer 10 per cent in his day. Smith’s concern was what we call growth – he called progress to opulence – and one of the causes of wealth was summed in his growth model as the allocation of net profits to productive activity – products of land and labour that generate a revenue that covers the cost of the factors, plus a net profit for the next round of ‘the great wheel of circulation’.

State expenditure is largely on the products of unproductive labour (as a factor), no matter how useful or necessary its output maybe (defence, justice, education, health, and those public projects that facilitate commerce). These do not replace the stock of capital used in their production, unless they charge a market fee. All capital directed away from productive activity alters the balance between natural growth inducing activity and consumption.

Neither New Labour nor Conservative governments are Smithian. Smith did not support any political party in his day, and it is most unlikely that he would qualify, or wish to do so, as a ‘spiritual early member of "New Labour".’ This is as meaningful as those neoclassical economists who claim him as a “spiritual early member of Chicago’s faculty’ (George Stigler said Adam Smith was ‘alive and well and living in Chicago’).

[Read Julia Langdon is the Daily Telegraph at:]


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