Wednesday, June 8, 2011

Do 'economists' really think increasing tax rates is 'the' answer?

Last Sunday 52 'economists' signed a letter published by the Observer under the heading: Coalition's spending plans simply don't add up.

Today the Telegraph publishes a rebuttal signed by a number of different economists. The rebuttal is supported by the Adam Smith Foundation which is quoted by the Evening Standard as claiming that "only 15 of the 52 are actually practising mainstream economists". Apparently the 52 include left wingers, some who are overseas-based and a number of retired economists - as if any such qualities reduce the credibility of their views. How odd.

As it happens I don't agree with much of what the first letter says about tax but I'm happy to dispute it on the facts. It includes an assertion that:
".. a more effective strategy for sustainable growth would be clamping down on tax avoidance and evasion, as well as by raising taxes on those best able to pay"
I'm not any sort of an economist but I do know a thing or two about the tax world.

HMRC has been pushing just such a clampdown on tax avoidance and tax evasion for years. This was encouraged and supported by the Labour Government and there has been no discernible change under the Coalition Government. I have referenced many such examples on this blog in the past.

So what are the 'economists' really saying about tax? Ah yes:
"Raise the taxes on those best able to pay".
To an extent I share this desire. It's right - in theory.

I recall sharing my disappointment that the rate of CGT was only raised to 28% by this Government (up from the 18% rate brought in by Labour in place of the old 40% rate). As recorded on this blog last year I was told by a senior Treasury adviser that their modelling showed that had the rate increased above 28% the expected aggregate tax take from CGT would fall. This modelling is presumably driven by belief in the validity of the laffer curve.

I am sure that the rate of tax payable on one's income and gains does affect behaviour. Many high earners these days get to keep less than 50% of their income (after tax) and this is demotivating.

Thus 'The' solution is not a simple one of increasing the rate of income tax (or CGT) payable by the richest in society ("those best able to pay"). Instead HMRC and the Government have to continue their ongoing efforts to remove loopholes and overly generous tax reliefs. The complexity of our tax system makes even this 'simple' solution more complex than anyone would like. So it takes time. I wonder if 'economists' can agree on this?

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