Less Equals More

Last month I wrote about how it would do the public sector no favours heavily taxing the banks.  Today Daniel Hannan in the Telegraph has written an article on a similar theme, arguing that we should not be taxing the wealthy too much as this actually raises less tax revenue.

Hannan rightly says that the wealthy will simply take steps to avoid paying this high tax.  Either by devoting time to clever tax avoidance, which means less time for wealth creation which creates jobs, or even worse by moving abroad and taking their wealth creation with them, or by not bringing their wealth here in the first place.  Either way Hannan says, according to the Adam Smith Institute, “the Treasury will be worse off by between £350 billion and £640 billion over the next decade. To get a sense of what that figure means, bear in mind that the “cuts” so far amount to around £12 billion – a sum which has been more than offset by increases elsewhere.”

What the financial crisis has shown is that the ‘trickle down effect’ does exist.  However, unlike previous examples of the trickle down effect, this has been proved in reverse.  In other words, the financial crisis hit the banks and firms hard, this in turn has trickled down and affected everyone, in very much the same way wealth trickles down when they are doing well.

Taxing the wealthy heavily means there is less money to trickle down and less tax revenue, a double loss situation.  As Hannan says, “the rich won’t sit around waiting to be taxed. They take steps to minimize their exposure.”  As well reducing tax revenue by forcing the wealthy abroad or to avoid tax, it will seriously decrease the money they have to invest in creating wealth.  Their wealth creation creates jobs, and ultimately increases the amount of taxable people and therefore tax revenue.  On top of this, the less money the wealthy are taxed, means the more money they have to spend, which again creates jobs and thus more taxable people.

With UK growth in the second quarter of 2011 at 0.2%, it is becoming increasingly clear that the UK cannot simply cut its way out of this recession.  George Osbourne must create a solid framework for wealth creation to flourish, along with measures such as cutting red tape and improving training, the 50p top rate of tax must be abolished as it is inhibiting the trickle down effect which we so badly need.

Daniel Hannan’s Telegraph article can be found here:  http://blogs.telegraph.co.uk/news/danielhannan/100099370/top-rate-tax/

My previous blog on why we should not heavily tax the bankers can be found here:  https://rightblueview.wordpress.com/2011/07/01/unions-and-strikes-should-not-bite-the-hand-that-feeds/

Unions and strikers should not bite the hands that feed.

One of the many arguments made by the unions and those striking yesterday was that they did not cause the financial crisis, and thus the money should be taken from the banks.

There is an element of truth in this, the crisis did originate from the banking sector.  However, while one may make the moral argument that they should be punished, in reality this would do the public sector no good at all.

In very simplified terms, the private sector is the money making sector of our society, it creates wealth and this wealth pays for the public sector.  To take money from the banks may bring some money back into the public purse, but only in the short-term.  Effectively it will choke the banking sectors ability to invest in wealth creation, in other words it’s ability to use money to make more money.  This flow of money into the public purse from banks creating more profit to tax from, and more people being employed meaning more tax, would decrease.  Overall this would mean less tax revenue, and therefore less money to spend on the public sector.  Not to mention the effect it will have on pushing banks abroad meaning job losses, and a loss of wealth creation.

On the same theme, unions and strikes would be wise not to disrupt the private sector too much, as after all they are creating the wealth that pays their wage and pensions.