Is there a critical shortage of rich people?

Highclere Castle, GB 2016

What percentage increase in UK government spending do you think there will need to be to bring public services up to the level we should expect from an advanced economy?

The additional spending will have to ensure:

  • That there is never a winter crisis in the NHS;
  • That the state pension is sufficient to provide a fulfilling and enjoyable retirement;
  • That the frail elderly are guaranteed the best possible care;
  • That every ‘bog standard’ comprehensive is brought up to the level of the ‘best’ grammar schools;
  • That everyone has a decent, truly affordable home;
  • That there is a job, paying a Living Income, for anyone who wants one.

All that and much more.

Ask a Left-leaning person this question and they are likely to say that spending will have to rise by at least 20%. Many will say it needs to be much higher still. Ask them how they would pay for the improvements and, more often than not, they will say that we need to increase taxes on the rich.

Putting aside for one moment the fact that taxes don’t pay for spending, there is a problem with the ‘let’s tax the rich more!’ argument: we don’t have enough rich people. Let’s look at some facts to see why:

  • Yearly state spending is around £800 billion, so a 20% increase is going to require £160 billion extra from somewhere;1
  • In 2015-2016 (the latest available figures) income tax at the ‘higher rate’ of 40% on earnings over £42,385 raised £33 billion;2
  • Income tax at the ‘additional rate’ of 45% on earnings over £150,000 raised £26 billion.

Let’s define rich people as those who earn over the ‘additional rate’ threshold of £150,000 and assume that a rise in the tax rate produces an exactly equal percentage rise in revenue (it doesn’t). Doubling the ‘additional rate’ tax back in 2015-2016 from 45% to 90% would have raised only an extra £26 billion (26 × 90 ÷ 45), which is well short of the £160 billion requirement.

What about defining a rich person as someone who earns over the ‘higher rate’ threshold (now £45,000)? In 2015-2016, increasing the ‘higher rate’ from 40% to 70% would have raised a further £50 billion (33 × 70 ÷ 40), bringing the total increase to £76 billion. It’s still not enough. It would also be politically suicidal and the dynamic effects of such sudden and massive cuts in individual spending capacity would be disastrous.

So, impractically large increases in tax on the wealthy are not going to ‘pay’ for the desired level of public services. And a modest increase will make very little contribution: a five percent increase on both the ‘additional rate’ (26 × 50 ÷ 45) and the ‘higher rate’ (33 × 45 ÷ 40) would raise a mere £7 billion — less than 1% of total state spending.

As Stephanie Kelton says,

Money doesn’t grow on rich people3

 

Now, I am not saying that we shouldn’t tax the rich more. We should, but not because we need their money to fund spending. We should tax the rich because it achieves other socio-economic objectives: it reduces inequality and it deprives the rich of the power that comes with excessive wealth.

And we shouldn’t rule out very high income tax rates for the very rich — a 90% marginal rate, for example. These are the sort of rates that were the norm in the 1960s, when inequality was low and before the form of capitalism which we now call ‘neoliberalism’ took over. However, it took decades to bring tax levels down to the current level and it would take decades to get them back up again.

Of course, some on the Left think there are other ways we can extract money from the rich. All these ideas come with their own sets of problems, particularly anything to do with taxing savings or taxing corporations.

The trouble with thinking that taxes pay for spending is that it lays a trap for progressive politicians, and the Labour Party is well and truly ensnared. John McDonnell persists in pushing the household model of government budgets;4 Jeremy Corbyn persists in coupling new policy initiatives with increased taxes.5 The Labour Party is doing nothing to change the narrative. All it is doing is giving credence to the nonsense that the UK government is financially constrained. In effect, the Labour Party is providing intellectual backing, hopefully unwittingly, for austerity.

The solution is to become economically adroit and stop thinking that taxes pay for state spending. It’s actually the other way around: spending causes the tax to happen and almost all spending is eventually taxed away. The only time government needs to consider raising tax rates is when all the country’s resources — people and stuff — are in use and there is the risk of inflation. For example, when there is true full employment there is a risk of price rises and the government may need to reduce spending or increase taxes.

Ideally, the government won’t have to make any difficult decisions regarding spending cuts or tax rises because it’s the job of the MMT Job Guarantee to act as an automatic stabiliser. The Job Guarantee adjusts spending in real time without the need to tinker with tax rates.

Under extreme conditions, the Job Guarantee may be insufficient to control inflation and tax rate increases will be required. That’s when we need to tax the rich more, either directly through income tax or indirectly by increasing tax on the things the rich tend to buy — caviar and yachts, for example.6

There may not be sufficient rich people to ‘pay’ for spending, but there may well be enough of them for us to control inflation without harming the poor.

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1. See Section 1.8 in Autumn Budget 2017, 22 November 2017, HM Treasury.
2. See Table 2.6 in UK Income Tax Liabilities Statistics, 25 May 2018, HMRC [PDF].
3. Kelton’s little quip appears a lot in articles about MMT. Here’s one: Stephanie Kelton Has The Biggest Idea In Washington, 20 May 2018, Huffington Post.
4. When asked by Martin Wolff ‘Does he share the view that ordinary people do not understand economics?’, John McDonnell answered: ‘Most ordinary working people know how to budget better than any politician, largely because they are living off low wages and they have to, therefore, make sure they can get to the end of the week. The best budget person I ever met that understood real economics was my mum. My dad would come in, hand her the wages and, because it was that sort of generation, she would look after the household and we would get by.’ Economics 101, 27 July 2018, BBC Radio 4.
5. Jeremy Corbyn: I’ll tax tech firms to subsidise the BBC licence fee, 22 August 2018, The Guardian
6. With any resulting job losses in the fish egg or boating sectors picked up by the Job Guarantee.

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