POLITICS
How Mrs Thatcher makes the rich pay more taxes
FERDINAND MOUNT
My nomination for Own Goal of the Year goes to Mr Frank Field, the independent-minded Labour MP for Birkenhead. It was Mr Field who asked the Chancellor of the Exchequer to tell us the percentage share of income tax paid by the highest-paid five per cent in the country for each year since 1978-9.
The intention was presumably to show how 'Thatcher's tax cuts for the rich' had reduced the share of the national burden shouldered by her City friends. Alas for Mr Field, the reverse was the case. When Labour was last in power, the top five per cent contributed 24 per cent of the total paid in income tax. Now after the top rate has been reduced from 83p in the pound (98p in the case of investment income) to 60p, the top people contribute 26.7 per cent. The same is true if you confine your observations to the top one per cent of taxpayers, or expand them to cover the top ten per cent, who now pay 37 per cent of the total, as against 34 per cent in 1978-9.
It is thus proved — as it has been simultaneously shown in the United States — that the effect of reducing penal top rates of taxation is that the Treasury receives more not less revenue. In Amer- ica, Mr Reagan cut the top US tax rate from 70 per cent to 50 per cent, and revenues collected from this bracket tri- pled from $5 to $15 billion, as Tom Bethell reported in his combative Spectator article last week. He rightly twitted the British chattering classes for their genteel and guilt-ridden reluctance to confront these facts.
After all, we all know perfectly well that if tax rates are confiscatory, the rich simply do not pay them. By fair means or foul, they and/or their incomes disappear from view. Businessmen and businesses become preoccupied with evasion and avoidance. Enterprises are curtailed, stifled or aborted because of the tax menace. We should not therefore be surprised that, when the menace is partially lifted, the animal spirits of entrepreneurs (and indeed of the idle rich also) lift too. Tax lawyers find business is a little slower. One or two tax funks slip back into territorial waters.
Now all this is inconvenient, most obviously for the Labour Party, which proposes to raise more than £3 billion by restoring 'Thatcher's tax cuts for the rich' and using the proceeds to pay for Mr. Meacher's immediate programme for rais- ing pensions and other welfare benefits. This won't wash. It doesn't matter how Mr Hattersley does it. There are not going to be any proceeds. If the top rates of tax go up again, the Treasury will simply receive less money. Indeed, Mr Lawson might well raise more money to spend on hospitals and sewers by cutting the top rate of tax to 50p or even 40p in the pound.
However, the tax-cutters do not tend to confine themselves to the top rates. Like President Reagan — who has now slashed the American standard rate to 15 per cent and the top rate to 28 per cent — they would like to cut all tax rates. And here life is not quite as easy as the supply-siders make out. What was derided as 'voodoo economics' (or 'California' or 'sunshine economics') was not, as Mr Bethell claims, the belief that top rates of tax could be reduced without harming Treasury re- venues; it was the belief that all rates of tax could be reduced without any adverse consequences. And here Mr Reagan, Pro- fessor Laffer and the supply-siders have been proved a fraction optimistic.
Professor Lawrence Lindsay of Harvard demonstrated to last week's London Con- ference on Taxes and Growth (a kind of American mission to heathen climes which have not yet seen the light) that while taxes paid by the very well off in the United States were about $8 billion higher than under the old rates, taxes paid by everyone else were nearly $90 billion lower. Tax cuts for everyone do not solve budget deficits, to put it mildly. Nor is this very surprising. In this country, the vast majority of the population are locked into PAYE and enjoy only modest scope for evasion or avoidance or indeed for increasing their earnings. The undoubted incentive effects would be unlikely to outweigh the inescap- able loss of revenue.
But to the Chancellor approaching an election, tax cuts for the rich alone is hardly an enticing slogan. It would be more attractive to concentrate the reductions on the group of people who still have to pay the marginal rates which used to confront millionaires: those low earners caught in the poverty trap — somewhere between £80 and £100 a week — in which pretty well every extra penny they may earn is taken away in lost welfare benefits. But the existing methods of helping these people either by raising the threshold at which people start to pay tax or by reducing the standard rate of income tax — benefit everyone who pays tax and so do cost a lot of money, however desirable their effects on our animal spirits.
As long as the State is footing most of the bill for health, education and welfare as well as for defence, there is a limit to the reduction in tax rates that can be afforded or indeed that will receive popular support. The 'poverty trap', and the disincentive to work at all which is closely associated with it (`the unemployment trap'), will be solved only by subtle adjustments to the tax-and-benefits system, not by crude across-the-board tax cuts.
In particular, dealing with the two traps requires two great recantations from the oversimplifications of the early Thatcher years. The first oversimplification — which has already been tacitly reduced by Lord Young — is that the unemployed cannot be helped back into work, except by a general improvement in national economic per- formance. The 'Restart' programme brings together the existing schemes, such as the community programme, into an overall system of what can only be described as 'pastoral care'. The longer-term unem- ployed are to be trained, encouraged, chivvied and eventually, if need be, more or less compelled into taking up jobs, many of which are provided or supported by government in defiance of the article of faith that 'government cannot create jobs'. This may be justifiable on the grounds that the trade unions and the job protection and minimum wage laws have set an artificial floor for wages and created a web of regulations which have destroyed the natu- ral market for low-paid jobs. But a re- cantation it is none the less.
The second recantation — which falls to the Chancellor — is to reverse Sir Geoffrey Howe's introduction of a single standard rate of tax (at present 29p in the pound) and go back to the gentler gradient of lower starting rates — much more common on the Continent. There are technical pros and cons, but from a commonsense point of view it does seem odd that people on the edge of poverty should start to pay income tax at a rate higher than the Rockefellers now face.
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