Monday, June 18, 2007

Against Stupidity ....

Jonathan Ivinson in Guardian Unlimited asks: ‘How will Gordon Brown be judged as chancellor of the exchequer?'

He has read Adam Smith (as a quotation or from the Wealth Of Nations) and presents the obvious conclusion without thinking about it too carefully:

“The chancellor's aspiration to create a "modern tax system based on principle" is difficult to reconcile with the reality of the tax system today. Adam Smith's concept of the principle of equity in taxation stated that the burden of taxation should fall on those with the greatest ability to pay, perhaps a useful starting point for a Labour chancellor.”

Jonathan confuses burden with a high rate of taxation on the rich, who can afford to pay more, and should on equity grounds do so. I think this catches some of
the spirit of Smith’s Book V of Wealth Of Nations.

However, that is where Jonathan goes wrong. The purpose of taxation is to pay for the necessary expenditures on government in defence, public works and institutions, education (and in Smith’s mind, the treatment of ‘obnoxious diseases’) and the ‘dignity of the sovereign’ (legitimate expenses of government – the Houses of Parliament, embassies, entertainment of foreign dignitaries, and so on). Today there are much wider responsibilities of government, but for the essence of the argument about tax rates we should set that aside.

The purpose of equity in a tax rate debate is not to punish the rich, or to punish the poor (Smith did not fancy taxing wages of the poor, for instance). Hence, the old Labour habits of 98 per cent income tax rates were not a sign of labour’s virility in the socialist canon of punitive taxation, because the real test of an appropriate tax is its contribution to the total tax requirement of the democratically elected government. If a 98 per cent, or any other percentage, raises less tax revenue than some other rate, its equity object is defeated.

Dictators who killed kulaks in early Soviet Russia, or who expelled Asians from Uganda, or who have driven out European farmers in Zimbabwe, do not understand wealth-creation. Their people reap what the dictators don't sow; often famine, always avoidable disasters (but the dictators never go hungry). Those in Britain who want to stop East Europeans or anybody else coming here to work, do not understand wealth creation.

Old labour socialists do not understand wealth creation. Jonathan Ivinson appears not to understand wealth creation either. What he proposes is to focus on the rate and not the tax take from each level of the income distribution. The higher the tax rate on rich and poor alike, the lower the pace at which people work and people create work. That is true for a multi-millionaire and a single mum contemplating a part-time job.

If the risk of a business failure and a 98 per cent tax rate operate, the millionaire lives off his or her income (elected governments do not last forever). If a single mum is hardly better off working than living on benefit, she prefers not to do so. If a skilled plumber cannot make extra work, net of tax, compensate for the effort, he doesn’t seek extra work, which leaves plumbing work not done.

Those who advocate raising the tax rates do not understand how to create wealth in modern Britain, and certainly don’t appreciate how people, themselves included, respond to incentives, and as importantly, to disincentives.

It is an empirical question. Does a 60 to 98 per cent tax band raise as much money for government expenditure as much as a 10-40 per cent tax band? Would a 15 per cent rate raise sufficient to pay for expenditures? In which tax regimes does wealth creation thrive and in which does it wither?

If more tax revenue is generated from lower rates of taxation, with the more affluent paying a greater proportion that the very poor and disadvantaged (who should not pay anything), this would meet the requirements of a Smithian tax policy. Of course, we have to look at his recommendations for expenditure too, but that’s another debate.

Adam Smith understood this and so should the people who pillage Wealth Of Nations in search of comfort for their programmes of non-wealth creation.

But as Schiller said: ‘against stupidity, even the gods battle in vain.’


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