Re: Tax and spend!
Never having studied economics beyond a "business" module to an electronics degree in the 1980s, I really enjoy your articles - even if I don't always agree with either your sentiments or your solutions. Apologies if I seem to have muddled thinking in what follows. This article was particularly interesting, and a question was forming in my mind, crystalised when you said:
A rough rule of thumb is that, at current taxation levels, raising £1 in tax destroys £1.30, £1.40, in economic activity
I've often had the feeling that certain flavours of government see that argument slightly differently, and it ties in with my unease about the VAT system as we have it in the UK. The fact is that if you give more money to the poor they are much more likely to spend it on life's necessities - many of which are VAT exempt - than on life's luxuries. New school uniform for the children, slightly better quality sausages for tea, putting a bit aside in the building society "for a rainy day", that sort of thing. I am not of the school of thought that there are hordes of lazy layabouts "out there" spending their benefits on fags, Sky Sports and foreign holidays, despite living in one of the country's poorest areas. A few, perhaps, but not hordes.
Taking money away from the rich conversely reduces their spend on luxury items which are all subject to VAT or a similar tax and hence it reduces total tax take, and some governments are afraid of that, ignoring the economic benefit to (say) the farmers who farm the pigs that end up in the sausages. These governments also use the argument that richer people, taxed more heavily, can take their "incomes" (and hence tax) elsewhere, but I wonder if that really has much of a genuine effect?
This is related to the dog-in-the-manger, or the "I'm alright Jack" attitude I seem to hear more and more often, particularly from those who don't have to worry whether they will have to cut back on the shopping next week in order to afford the travel costs to work. This attitude usually manifests itself in arguments such as "I pay for private health insurance, so why should I also contribute to the NHS?" or (and I get really cross about this one) "I have taken the decision not to have children, so why should I pay to educate yours?"
The problem with the tax system is that it seems many people don't actually understand what it is, how it works and what it's for. Your "tax and redistribute" concentrates for simplicity's sake on direct redistribution, but ignores the vast benefit of indirect distribution afforded in this once enlightened country by the very existence of state-funded schools and the fantastic National Health Service which has paid my family back, just in the case of one child, probably more than I have personally paid in over the 20-odd years I've been working. We have friends in two other families who have benefitted even more than we have.
I also have long wondered if, in these days of everything computerised, there's a way of avoiding the high marginal tax rates that you correctly point out can be a disincentive to some kinds of work. Can we not have such a fine-grained progressive tax system that there are effectively no step-changes at all? Stamp Duty on house sales would be an excellent place to try it out because the step-changes in that tax very obviously distort the market - if house prices in a particular street are around the £250,000 mark (for example) then it is nigh-on impossible for any individual house to break through that £250,000 barrier unless it can make the jump to somewhere around £270,000 - this is a big ask if you're trying to justify adding a kitchen extension!
Might fine-graining income tax also help to alleviate the problem of marginal tax increases, particularly as benefits begin to be withdrawn?
Crumbs, sorry, didn't mean to get carried away. Better go do some work!