The myth that anyone on the left understands ecconomics…

Spotted this classic by a guy called Danny Dorling on Left Foot Forward today. Apparently he’s a visiting fellow at the Institute for Public Policy Reasearch (IPPR). Clearly whatever they do, it certainly isn’t studying economics…

One of the greatest myths that was regurgitated in the aftermath of the budget was the claim the tax take on the rich rises the less they are taxed.

Straw man. No-one is claiming that is a universal law – if they do so they are economically illiterate. The general understanding of economists is that as tax rates increase, the tax take follows a curve. The shape of this curve is debated, but there is a general agreement that it peaks in the range 35-50%. Reducing the top rate of tax to 45% probably increases the tax take (see also the graph in the treasury red book). Dropping the top rate to 40% would probably yield no change.

It was said this occurred when Nigel Lawson was chancellor in the 1980s. What actually happened in the 1980s was that as the rich took a greater and greater share of national income the share of income tax they paid went up.

What you seem to have forgotten to mention is that national income also went up. Unless you are a wealth hating class warrior type, who cares if the rich get twice as rich, if everyone else get 10% richer as a byproduct. It’s this confusing absolute wealth (how many mars bars can I buy for each hour a I work) with relative wealth (how many more mars bars than me can my boss buy for any hour of work) that makes no sense.
I’d rather exist in a society where I earn £26,000 a year and the 1% earn £10,000,000 a year than in a society where I earn £20,000 and the 1% earn £50,000 a year. Even better if I can persuade the guy earning £10,000,000 to pay down £2,500,000 in tax, as that means I need to pay less…

The richest 1% now pay more than a quarter of all direct income tax. This is not because of the 40%, 45% or 50% top tax rate, but because they now take home such huge salaries and bonuses (and incomes in other forms).

Ah, that’s what you think. Try taxing them at 75% and see what happens.

You keep going back to the cake fallacy – that national income is a cake that gets cut up, and if the rich get a big slice, then everyone else gets smaller slices. What actually happens are if the incomes of the rich grow, then the cake gets bigger

Today the best-off 1% take home a greater share than they have done at any time since directly after the First World War.

So what – good for them. That cake has got bigger, and that’s good for all of us.

Allowing the richest 1% to take home more and more income and pay less tax does not create wealth and jobs. Employment levels have been highest in Britain in the years when the richest 1% had their lowest shares of national income, from 1945 to 1979.

Well, yes, that’s when we got a close as we ever did to communism. And as you have noted, that means the richest 1% got the lowest share of the national cake. It was also a small cake, as communism makes evey one equally poor. Oh, and we had loads of strikes and industrial unrest, had to call in the IMF, and the state ended up broke… sounds like utopia to me.

The richest 1% didn’t pay a great absolute amount of income tax then because they were not taking such a high and unfair share of all the monies paid out in wages and salaries nationally.

For the 1000th time, there isn’t some magic amount of money which gets divided between everyone – the reason the rich weren’t earning as much was that the high tax rates deterred them from doing as much work, thereby lowering GDP, which makes us ALL worse off.

It was not the high tax rates that meant the tax take from the richest was less then, they were less rich and so had less to tax, as Figure 5 shows, and there was less need of their taxes because a wider cross-section of society had enough then to contribute.

In a report published by IPPR today, “The case for austerity among the rich”, I try to make this case and show just how much, in both the UK and USA, incomes have become concentrated at the very top of society so there is now so little to share around amongst the bottom 90%.

No, because, you stupid man, unlike things funded by the government which has limited cash, GDP is potentially limitless, and increases as productivity increases. Those who enable increased productivity do very very well out of increases, the rest of us do moderately well. This is all a good thing, as it means we are all getting richer.

I show how an increase in incomes of 1% of those 9 out of ten people, coupled with reductions in income at the top, would save trillions of dollars and billions of pounds a year. I then show how this occurred before (in the 50 years from 1920 to 1970).

Those items of discretionary spending that would be most hurt by a little more austerity among the rich are listed: luxury cars sales, board school receipts, and Michelin star restaurant profits, and the geographical part of the country which would lose out economically is highlighted. There would be a few losers as well as millions of winners from any slight movement towards greater equality.

Oh, so you do admit that rich people spending money drives economic growth by employing people, who can then earn money in turn, which they spend, creating jobs for other people. Better tax that quick, we don’t want any economic growth do we – everyone might get richer.

The mainstream advocates of a little austerity for the rich in mainland Europe and the United States of America are also listed, places where a little haircut for the rich is a much less alien concept.

The paper uses IMF figures to show just how low public spending in a country like Britain gets when you end up relying on such a few very wealthy people to pay so much tax (so much it cannot be repeated enough, because they pay themselves so much).

Even under New Labour, as Figure 2 shows, public spending in Britain was lower than in all but a tiny handful of European countries (Spain and Ireland) and the USA, and it is set to fall below all of them by 2015 under coalition policies.

Nothing like a good dodgy graphic. Note the following – the graphic dates from 2010, so more than half of it is projection, and probably not that accurate. Also worth noting that almost all these countries are either bust or close too – just like we are. As a final note, not where the projected spending lines end up – for the UK it is more than the 2002 figure, for most other countries it is less. Notice too significant bunching around an intended 2015 spending of 40% of GDP – this is because history keeps proving that taxing beyond about 40% of GDP tends to crash the economy, rather than raise extra cash.
Interesting choice of stat too – state spending as £ per head adjusted for inflation would make for a graph that would look quite different…

The UK is slowly transforming itself into one of the most unequal, most low taxing, most low public spending countries within the rich world.

That transformation began under Margaret Thatcher, was slowed under John Major, accelerated again under Tony Blair, slowed a little again under Gordon Brown, and is now accelerating again under the coalition.

Under Tony Blair, the highest paid 0.1% of households gained from ‘earning’ 61 times the average wage of the bottom 90%, to receiving 95 times their average wage a year by the time Blair resigned. It was possible to get away with this then because of overall income growth (a very little at the bottom, a great deal at the top).

In other words, there was growth, we all got richer. Yay. Sounds like those tax policies were good.

For the government now, as their economic arguments fail, they may come more and more to rely on hate to maintain their credibility. Hate ‘benefit-scroungers’, hate ‘immigrants’, hate the last government said to have ‘overspent’ your money.

It should be possible to offer an alternative to hate. And an alternative to simply offering the policies of the coalition a little watered down. A small part of that alternative would be the case for more austerity among the rich and dispelling of the myth that reducing taxes on the rich somehow makes the other 99% better-off.

Reducing taxes on the rich (to the extent that the coalition have done) does make the 99% better off. It does so in two ways – it causes them to spend more, earn more, pay more tax as their wages increase. (This doesn’t contradict what I said at the beginning – we are on the wrong side of the laffer curve at 50% tax take – dropping to 10% tax would reduce tax take because their wage growth wouldn’t be sufficent to cover the shortfall). We also win through the rich spending money which gives GDP growth – i.e. more jobs, more people off the dole, more people with decent incomes – which in turn gives more growth.

So, taxing the rich a bit less then is a good thing for eveyone, and Danny Dorling is a union funded (probably, I can’t think of anyone who would pay for his rubbish) economic illiterate (certainly).

The Prole

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5 Comments

  1. What a delicious job you’ve made of demonstrating yourself to be a complete idiot.

    By the way, I’m on the left, have a degree in economics, and work in the city (and so apply economics every day). So, I would say I have a reasonable understanding of it.

    There are so many things wrong with your argument that I do not propose to spend an inordinate amount of time going through it. It’s not my job to be your tutor, after all, although you clearly need one.

    The main elephant in the room is your assumption that economic growth since the era of cuts in the top rates of tax has all been down to the wealthiest in society creating massive increases in productivity. On what basis do you make this claim? Go and observe growth rates over the last 100 years during periods of all sorts of extremes in marginal tax rates, as well as across countries (some with rather higher marginal tax rates than ourselves). What do you observe? Do tell!

    The idea that the size of the pie in the era when we “came closest to communism” was tiny and that we now enjoy an enormous pie, all down to cuts in the top rates of tax, just illustrates your (i) ignorance of economics (ii) ignorance of macroeconomic history (iii) ignorance of history

    By the way, the guy from the IPPR has not, in my or any reasonable reading, committed the fixed pie fallacy – that is entirely something you have projected on to the article.

    Go away and learn about economics dispassionately – not what you want to think it says.

  2. Ah, I see that comments don’t get posted immediately – is that so you have time to delete those you don’t like? Maybe not, I wonder. But, most likely I would imagine. Not a good sign if you can’t tolerate others picking apart your arguments…

    1. Hi,

      Comment policy is simple – unless it’s purely abusive, spam, or likely to get me sued, I will publish comments. The slight delay is simply because I’ve been working away from the net all day (oh the joys of the annual stock take in a manufacturing business), and so have only just seen there are comments awaiting approval.

      I’ll respond to your more detailed comment in a bit – I’m trying to look some numbers prove (or disprove) some of your claims (if you can recommend a source of UK GDP type data(ideally inflation adjusted GDP, inflation adjusted GDP per capita, and annual GDP growth) that goes back to say 1900 I would be eternally in your debt – recent figures seem easy to get, getting back beyond the WW2 seems much harder to find)…

  3. Adrian :

    What a delicious job you’ve made of demonstrating yourself to be a complete idiot.

    Hey, personal abuse is always fun…

    By the way, I’m on the left, have a degree in economics, and work in the city (and so apply economics every day). So, I would say I have a reasonable understanding of it.

    There are so many things wrong with your argument that I do not propose to spend an inordinate amount of time going through it. It’s not my job to be your tutor, after all, although you clearly need one.

    I’m not sure that understanding economics is a pre-req for working in the city. It’s certainly not for being chancellor of the exchequer after all, as Gordon (I’ve abolished boom and bust) Brown is proof. If you can be chancellor without understanding economics, I’d hazard a guess you can get to do most other jobs too. Anyway, on to your substantive point…

    The main elephant in the room is your assumption that economic growth since the era of cuts in the top rates of tax has all been down to the wealthiest in society creating massive increases in productivity. On what basis do you make this claim? Go and observe growth rates over the last 100 years during periods of all sorts of extremes in marginal tax rates, as well as across countries (some with rather higher marginal tax rates than ourselves). What do you observe? Do tell!

    I’ve just spent a happy couple of hours pasting GDP data into excel. Probably the most useful/relevant graph I produced was a rolling 5 year average % change in real GDP/Capita from WW2 through to the late 2000s. That shows a marked decline in growth rates from the late 1960s to the early 1980s, and then significantly faster growth rates through the 1980s, with a big bump in the early 90s, and then more rapid growth into the 2000s. There certainly appears to be a correlation between lower top tax rates and an increased rate of growth, and higher top tax rates and slower growth. I’ll grant that proving a causal relationship is harder work (as is disproving it) to the point of impossibility, if only because of the sad no-repeatability of history.

    The idea that the size of the pie in the era when we “came closest to communism” was tiny and that we now enjoy an enormous pie, all down to cuts in the top rates of tax, just illustrates your (i) ignorance of economics (ii) ignorance of macroeconomic history (iii) ignorance of history

    GDP per capita in 2008 £:
    1970 £10,349
    1980 £12,400
    1990 £15,956
    2000 £20,128

    Looks like between 1970 and 2000 the amount pie per person has more or less doubled, so yes, the pie back in the 1970s was pretty tiny (I can’t imagine my life being much fun if I earned half what I do now)
    I would never claim that the whole adjustment was an effect of the top rate of tax – far from it, it was a combination of a large number of different things working together – however tax cuts were a significant part of the measures which turned stuttering growth (along with a government finance crisis) back into steady growth.

    I’ll be honest – I don’t think the 50p rate going to 45p will make much difference either way – it’s a symbolic thing to fight over to give the politicians(most of whom on all sides are either corrupt, inept or if your really lucky both) something to shout about. It’s not the 98% marginal taxation of the late 1970s, and except for public sector fat cats it’s fairly easy to evade via a service company type structure anyway. It just really annoys me when people witter on about the tragedy of the very rich getting richer, despite the fact that they pay huge amounts of tax in real terms, and despite the fact that most of them have got rich on the back of their own hard work which has generally involved creating jobs and wealth for others, as well as themselves.

    By the way, the guy from the IPPR has not, in my or any reasonable reading, committed the fixed pie fallacy – that is entirely something you have projected on to the article.

    I’d beg to differ – he keeps talking about the “share” of wages the rich get, in a way that seems to imply he things at any given time there is only so much “wages” to go round, rather than accepting that by increasing productivity you increase the wage pot (and particularly the wage pot of the productivity increasers in particular.

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