I am told in the Daily Fascist that the government’s ‘Plan B’ – if the economy fails to grow – is a tax cut to ‘stimulate’ growth. Apparently, the intention is to axe the 50p rate.
We have to resist this. It would be a disaster.
To understand why, you only need the merest smattering of an understanding of economics.
Wealth and its Origins
What makes us ‘wealthy’ as an economy? Where does society’s wealth come from?
Personal experience suggests that it comes from making a profit. What did Mr Micawber teach: ‘Income £1, expenditure 95p, result happiness. Income £1, expenditure £1.05, result misery’. It is a homely, common-sense-approach-to-economics to which Margaret Thatcher appealed. It is also the basis for our current rush to reduce the deficit – common sense tells us that our nation cannot go on living on debt, because WE cannot go on living on debt!
This thinking was also, of course, the basis of the ‘mercantilism’ of the 18th century. Governments reckoned that, if you imported as little as possible, and exported as much as possible, then your country would – by definition – become rich. The same thinking inhabits the modern fears about our ‘balance of payments’, and the demise of our manufacturing industry – the worry that we don’t ‘make’ anything any more.
The only problem is that, globally, the economy doesn’t work like that!
Here’s something they didn’t teach you at school. You were probably taught that the Industrial Revolution was the result of the cash nexus – that it was caused by capitalism … by all those enthusiastic Victorian entrepreneurs rushing out, building factories and making money.
Rubbish, all of it.
The key to Britain’s industrial wealth was not production, but trade. It was a guy called Adam Smith who realised that mercantilism only made societies POORER, and that the way to make everybody wealthy was to free up trade.
I used to teach my classes this with a game. I would give a pupil £1, and get him to ‘buy’ something (e.g. a pencil) from his neighbour. ‘What is the wealth of that desk?’, I would ask. After a while, some pupil with insight would realise that it wasn’t £1; the wealth of that desk was £2 – £1 in cash and £1 in goods.
Next, I used to get the whole class to ‘trade’ in a similar way – each pupil would ‘sell’ some item, take the £1, and then in their turn ‘buy’ an item from the next pupil and give them the £1 in ‘payment’.
First time through, I would run the simulation for a minute, allowing pupils to trade only every 5 seconds; at the end of the time, the collective wealth of the class was seen to be £13 – £1 in cash and £12 in goods.
Then, however, I would run the simulation a second time, challenging the pupils to ‘trade’ as quickly as possible. Sometimes they managed to conduct 150 transactions in the minute! Individually, of course, there were winners and losers – some people ended up buying a pencil shaving for their £1, others got a designer watch! But, societally, at the end of a minute of mad trading, the wealth of the class was anything up to £150+.
The economist John Maynard Keynes called this ‘the multiplier’ – when it is used to trade, £1 can create wealth many times its own value.
Wealth is created by trade, and the amount of wealth trade creates is dependent upon the ‘velocity of transactions’.
Are we wealthier than our forebears? The economic history of the 20th century can be seen as a series of tricks to speed up our buying – Hire Purchase so you didn’t have to save up before you could buy; ‘Access takes the waiting out of wanting’; air mail; next-day delivery; self-service; internet-shopping... The faster we trade, the wealthier the world as a whole becomes.
Trade and the Origins of Recession
Did you think the current economic recession was caused by the banking crisis? I suppose you do, because that’s what the newspapers are telling you.
It’s a load of rubbish. There is no reason in this world why a banking crisis – or a slump in the stock exchange, or even the bankruptcy of Greece – should per se cause a recession.
What has caused the recession is that we have stopped buying stuff from each other. And when I don’t buy a pencil from you, you can’t buy a loaf from Tesco, and Tesco don’t buy the flour etc. etc.
We stopped buying because we all suddenly realised that we were in debt, that the future was uncertain, and that we’d better ‘draw in our horns’.
And thus the perception of recession caused the recession.
This was also of course why Gordon Brown’s ‘quantitative easing’ failed to work as he hoped. He released £ billions into the economy, hoping that it would ‘get things going’ – but people did not go out and spend that money, they just used it to clear their debts and prepare for a bleak future.
In Keynesian terms, the ‘propensity to save’ negated ‘the multiplier’.
That, of course, is the irony of ‘austerity measures’. At the moment, the governments of Europe are busy imposing ‘austerity measures’ – impoverishing their people to try to ‘address the deficit’. After what I have just said you HAVE to realise that this is not a solution to the deficit. All that happens when you take money out of people’s pockets – by sacking them, or reducing their pay – is that they stop buying things. Then this throws the economy further into recession, taxes fall … and the deficit gets worse.
And that, of course, is also the irony about China! China, at the moment, is becoming the creditor of the west – out of the billions they have in their reserves from their humongous balance of payment surplus. If the western governments do not implement austerity measures, the Chinese are saying, they will not continue lending that money to the west.
How stupid can you get!
Not only is it stupid because throwing the west into further recession will make the world situation worse, but because there is a strong argument that – by stacking up those huge reserves and not spending them on western goods and services – it is the CHINESE who have caused the global recession in the first place, by slowing up trade.
Because, you see, just as trade is the creator or wealth, SAVING is the destroyer of wealth. When I save, I don’t buy. I slow down trade. I create recession.
Taxes and the Origins of Growth
Finally, what has all this got to do with cutting taxes?
It is the argument of the Right that cutting taxes encourages growth because it encourages entrepreneurial activity. When taxes are high, they say, businessmen can’t see any point in working, growing – so they go elsewhere, don’t employ people etc., and the economy suffers.
Again, this has the ring of commons sense. EVERYBODY – not just the entrepreneurs – hates paying taxes! We all want to stimulate enterprise, and in our capitalist society we acknowledge that it is the cash nexus which motivates.
Again, however, the only problem with this argument is that it is rubbish.
Economic historians have proved that the Depression of the 1930s was not caused by the Wall Street Crash. The Crash barely harmed half a million people in a population of 123 million (i.e. less than half a per cent of the population).
What caused the Depression of the 1930s was the inequality in wealth that had crept into US society – the rich were too rich, and 40% of the population were living below the poverty line, and the Crash made the situation worse because the government immediately introduced austerity measures (which made the poor poorer still). It was not the ruin of 600,000 speculators which caused the Depression, it was the poverty (and lack of spending) by 50 million poor people.
It is just the same in Britain today. The gap between rich and poor has been growing; austerity measures have hit the poor even harder. And all those millions of people are having to stop spending.
So what effect will abolishing the 50p tax rate have? Will it encourage spending, and increase trade?
Of course not. It will just make people who are already so-wealthy-they-don’t-know-what-to-spend-it-on even wealthier. They will put that money into their savings … and the recession will get worse.
When you are in recession, you don’t want to cut taxes, you need to increase them!
You need to take money from the rich and give it to the poor.
But the poor are so fickle, you say – they just waste the money I had to work so hard to earn!
Well, firstly, yes – precisely. When you give the rich more money they just save it and wreck the economy. When you give it to the poor, they go straight out and spend it and – hey, a miracle – the economy gets going.
And, secondly, you rich entrepreneurs – you don’t need to be worried about paying taxes and giving the money to the poor. Because you’ll get it back in days. Those poor people will take that money, and they’ll spend it … fritter it away on beer, on cigarettes, on food, on rent, on heating, on clothes you think they don’t deserve, on stuff you resent them having. But whom do they buy those things from? FROM YOU, you idiot.
And even if you don’t make beer, cigarettes, food, clothes etc., the likelihood is that you supply someone who does. Somewhere down the supply chain, you benefit.
Even under the last Labour government, we became accustomed to the mantra that, in order to help the economy, we need to keep taxes low. Every government aspires to be a tax-cutting government.
Maybe in a booming economy, that worked.
In a recession hit economy, it’s the road to ruin.
Cutting benefits takes money away from the very people who will spend it.
Cutting taxes gives it to people who will save it.
Rich people and businessmen generally approve of tax cuts, but they have to realise that – in the long term – impoverishing the poor will bankrupt their own businesses, because people will stop buying what they produce.
We need a government which has the wit to increase taxes on the wealthy, and to increase benefits for the poor.
Increasing benefits for the poor gets the retail economy going again.
Increasing taxes on the rich will cut into their savings, releases the multiplier, and in the long term secures their businesses.
And what happens to the deficit?
Well – because you’re paying the extra benefits out of increased taxes, the deficit doesn’t grow.
And because the government takes its cut from every transaction, and from every income earned, in fact taxes can grow still further and the deficit falls.
And we have TAXED our way out of recession.
One last comment. How is that, in 1947, in the poverty of the post-war world, Britain could afford the Welfare State, but today – with all our wealth and technology – we are apparently too poor to sustain it?
Here is your homework. Find out what the Income Tax rate was in 1947.