George Osborne, the Chancellor of the Exchequer, a man whose salary totals £134,565 receives government welfare.
But he claims he is about to give up the dole in the interests of fiscal sanity.
In an Op Ed in the Daily Mail Osborne writes:
This week my family will not receive the child benefit we’ve been getting every week since our children were born. Any household where at least one member is earning more than £60,000 will be in a similar position.
They can either choose to stop receiving child benefit, as we have done, or they can have the equivalent sum taken away through the tax system later.
Those earning between £50,000 and £60,000 will lose a portion of that child benefit cash.
It’s not an easy decision we’ve taken as a Government – these days, there aren’t any easy decisions.
Osborne’s claim is that only through contracting spending can we reduce the deficit, and only be reducing the deficit can we have a brighter future. He couldn’t be more wrong.
While it is absurd that rich men like Osborne receive child benefit that they don’t need while severely ill and seriously disabled individuals are thrown off welfare and told they are have to find work (even though unemployment is already elevated, with eighteen people applying per vacancy in 2012, so just how disabled and sick people are supposed to find work in such a depressed economy is quite a conundrum) this is merely a side issue to the wider folly of Osborne’s economic policies.
Balancing a government budget is not simple arithmetic like balancing a household budget. The two policy tools typically discussed in dealing with deficits — cutting spending, and hiking taxes — have powerful hidden effects that often (paradoxically) make deficits bigger, as has happened in the case of the extreme austerity in Greece.
If spending on welfare is cut, then the income of those who would have received that spending is cut, in turn cutting the incomes of others — shops, manufacturers, service-providers — who could have otherwise sold things to them, cutting the incomes of their suppliers, and so on. And the government will also lose any tax revenues that would have been paid, shrinking revenue and leading to bigger deficits.
If taxes are hiked, then not only does this shrink disposable income — leading to a similar contractionary effect as welfare cuts — but it also leads to Laffer-curve-style tax avoidance, as those subjected to higher tax rates move their income offshore, and use loopholes and creative accountancy to avoid paying taxes. This too can actually drink revenue and lead to bigger deficits.
The better option is to stop trying to balance the budget using contractionary budget cuts and tax hikes and instead focus on increasing output and decreasing unemployment by growing the economy. If the economy grows significantly, and government spending remains the same, then the budget deficit will by definition close itself (and the welfare bill will by definition shrink as more people find jobs). Although the capital markets are offering governments the ability to borrow at very low rates, there is really no straight binary choice between debt-fuelled stimulus and austerity. Policies that promote growth are possible without adding a penny of debt.
- Attract more foreign capital into Britain — there are trillions of dollars of foreign capital in emerging markets like the middle east, Russia and China. Britain could offer British citizenship and other incentives for citizens of foreign countries that invest in the UK. Foreign capital can be used to improve British infrastructure, like improving the road, rail and broadband networks, which will in turn provide new jobs.
- Increase entrepreneurship — use the bailed-out part-nationalised banks as a vehicle to offer business startup loans to unemployed people. There are millions of jobless people who want to work or a start a business, but cannot because of credit conditions and the weak job market.
- Deregulate small business — decrease the regulatory and tax burden for new businesses. Make it easier and simpler to achieve planning permission to build new homes.
Indeed, the current government has paid lip-service to some of the above, but with few tangible results. Britain’s difficult immigration laws continue to deter foreign investment. Four years after the bailouts and in spite plenty of promises from the government, the banking sector is still not lending to small business. The overwhelming thrust of the government’s policy has been contractionary austerity. And the overwhelming result has been weakness and contraction:
If Cameron and Osborne don’t change their strategy — move away from trying to cut absolute government spending, and move toward trying to boost the wider economy, and so cut government spending as a percentage of GDP, then the economy is highly likely to stay depressed.
And that would be a cut to everyone’s welfare.
It’s a multi-dimensional question.
The left says yes — income inequality has soared in recent years, and the way to address it (supposedly) is to tax the rich and capital gains at a higher rate. The right says no — that the rich already create more jobs and wealth, because they spend more money, and why (supposedly) should they pay more tax when they already pay far higher figures than lower-income workers?
Paul Krugman made the point yesterday that the tax rate on the top earners during the post-war boom was 91%, seeming to infer that a return to such rates would be good for the economy.
Yet if we want to raise more revenue, historically it doesn’t really seem to matter what the top tax rate is:
Federal revenues have hovered close to 20% of GDP whatever the tax rate on the richest few.
This seems to be because of what is known as the Laffer-Khaldun effect: the higher rates go, the more incentive for tax avoidance and tax evasion.
And while income inequality has risen in recent years, the top-earners share of tax revenue has risen in step:
So the richest 1% are already contributing around 40% of the tax revenue, taxed on their 34% share of the national income. And even if the Treasury collected every cent the top 1% earned, America would still be running huge deficits.
Yet the Occupy movement are still angry. A large majority of Americans believe the richest should pay more tax. More and more wealthy Americans — starting with Warren Buffett, and most recently Stephen King are demanding to pay more taxes.
At a rally in Florida (to support collective bargaining and to express the socialist view that firing teachers with experience was sort of a bad idea), I pointed out that I was paying taxes of roughly 28 percent on my income. My question was, “How come I’m not paying 50?”
How come? Well, the data shows pretty clearly that it’s unlikely that revenues would increase.
They may have a fair point that capital gains above a certain threshold should probably be taxed at the same rate as income, because it is effectively the same thing. And why should government policy encourage investment above labour by taxing one more leniently?
But more simply, people like King think the status quo is unjust far beyond the taxation structure. A lot of people are unemployed:
A lot of people are earning less than they were five years ago:
28% of homeowners are underwater on their mortgages. Millions of graduates face a mountain of student debt, while stuck in dole queues or in a dead end job like Starbucks.
We live in dark times.
Nearly 15 percent of people worldwide believe the world will end during their lifetime and 10 percent think the Mayan calendar could signify it will happen in 2012, according to a new poll.
With all this hurt, there’s a lot of anger in society. Those calling for taxing the richest more are not doing the same cost-benefit analysis I am doing that suggests that raising taxes won’t raise more revenue.
But they’re not unfairly looking for a scapegoat, either. While probably the greatest culprits for the problems of recent times are in government Americans are right to be mad at the rich.
This isn’t about tax. This is about jobs, and growth.
The rich, above and beyond any other group have the ability to ameliorate the economic malaise by spending and creating jobs, creating new products and new wealth. The top 1% control 42% of all financial wealth. But that money isn’t moving very much at all— the velocity of money is at historic lows. It should not be surprising that growth remains depressed and unemployment remains stubbornly high.
And every month that unemployment remains elevated is another month that the job creators are not doing their job. Every month that the malaise festers, the angrier the 99% gets. It is, I think, in the best interests of the rich to try and create as many jobs and as much wealth as they can. A divided and angry society, I think, will find it even more difficult to grow and produce.
America needs the richest Americans to pay more tax dollars — but as a side-effect of producing more, and creating growth.
If the private sector doesn’t spend its way out of the current depression, eventually the government will have to, of course. But it can do that with borrowed money, not taxed money.