The pundits say that supply-side economics is dead. If they mean
it is unfashionable, I agree. If they mean that supply-side
reductions in tax rates will not help ailing economies, or that
increases will not hurt them, I disagree. Anyway, the argument is
about to meet a real-world test in Britain.
It has long been argued by supply-siders that reductions in
marginal tax rates will bring in more revenue, not less. More
jobs will be created and the economy will flourish, everything
else being equal.
Many analysts do not accept this argument, partly because
of our careless use of language. We talk of “tax cuts,” a phrase
that conflates tax rates and revenues — prices and quantities.
Such language builds into our thinking the assumption that tax
revenues rise or fall in proportion to rates. It ain’t so.
Think of it this way. You run a fast food place and you
sell hamburgers for $10. But not enough money is coming into the
till. So you raise the hamburger price to $11. Do you really
expect sales to increase ten percent? Think again. How about
reducing the price to $7.50? Does you revenue then go down, or
up?
Think of tax rates and tax revenues in the same way.
In the U.S., the most important applications of the
supply-side idea arose with the Kemp-Roth capital gains tax rate
reduction in 1978, and then with President Regan’s reduction in
the top income tax rate (from 70 to 40 percent) in 1981. These
changes launched an economic boom that lasted for 25 years. They
also brought in tax revenues that were vastly higher than
predicted.
Journalists almost always talk of “tax cuts” or “tax
increases” when reductions or increases in tax rates is what they
should be saying. Their excuse is that “tax cut” is more
convenient and uses half the space. But in this case brevity is
the soul of confusion. Also, of course, most journalists are
liberals and want to believe that if the government raises tax
rates, we have no choice but to fork over more money. Taxes are
compulsory.
Here are the changes that Alistair Darling, the British
Chancellor of the Exchequer, promises for next year. In April,
the top income tax rate will be increased to 50 percent, from the
current 40 percent, and will apply to taxable income above
150,000 pounds. This is the sharpest increase in tax rates seen
in Britain for over 30 years.
That is the first piece of bad news for Britain, but here
is something equally bad. The country must hold a general
election no later than June. Almost certainly it will be in May,
2010. The leader of the Conservative Party, David Cameron, is
ahead in the polls, but his support has fallen, and a hung
Parliament now looms as a possibility.
What does Cameron say about the approaching tax-rate
increase? If elected, he says, he will not
– at least in the beginning — do anything about it. He
merely holds out the hope that he will be able to reduce the top
rate before the end of his first term.
I heard this last month from my brother, who is involved in
Conservative politics at the local level in Britain. He even got
himself elected as a councilman. Anyway, my immediate reaction to
that news was that Cameron deserves to lose the election, simply
on the tax issue alone.
In several other ways, Cameron has attempted to minimize
his differences with Labour, as though he believed that the
problem for conservatives is that they are not politically
correct enough. He soon signed on to the global warming scare,
for example. As a conservative, Cameron is to Margaret Thatcher
what Bob Dole was to Ronald Reagan.
Here are some more tax increases that are due to go into
effect in England. Fuel tax will be increased by 3.5 percent in
April. (A gallon of gas already costs $7 to $8 in Britain –
mostly taxes.) And the value added tax, reduced this time last
year to 15 percent to alleviate the financial crisis, will soon
be moved back up again to 17.5 percent. The Labour Government is
also drawing up plans for a windfall tax on the bonuses recently
paid to bankers. And a planned increase in the threshold level at
which inheritance taxes take effect has been scrapped.
Here is a one-word reason why these assaults on the rich
are a bad idea: Switzerland. The rich whom the government is
taking aim at are also the best placed to avoid the poison that
is being prepared for them. They can leave the country and claim
non-domiciled status for tax purposes. Switzerland is the
destination that has been in the news.
A high-end real estate agent in London has recently been
holding Swiss-relocation seminars and some of the city’s
wealthiest people have been briefed on the advantages of heading
off for Geneva or Zurich.
“There was virtual indifference to the U.K. tax system when
people were paying 40 percent,” said the managing director of the
group holding these (oversubscribed) seminars. “But when you’re
talking about 50 percent, all of a sudden HM Revenue and Customs
is in for a bit of a surprise. There are high net worth guys out
there saying enough is enough.”
As the supply-siders would say, 40 percent of something is
a lot more than 50 percent of nothing.
“Companies from McDonald’s, the fast food operator, to
Informa, the British publisher, are on the move to Switzerland,
because of onerous corporate tax rates,” according to the
Sunday Telegraph.
As for the rate at which tax refugees are taxed in
Switzerland, my brother tells me that it can be negotiated with
the government. Negotiated! That is what you call enlightened
government. The Sunday Telegraph
reported:
“Swiss personal tax rates are as low as 20 percent and
there have been reports of UK-based executives being offered a
ten percent rate as the government steps up its drive to entice
high earners in.”
One problem: Housing supply “is limited and rules denoting
who is able to buy a property are rigorous.” Property prices in
Switzerland are high, “but pale compared to top end sites in
London.”
In addition to collecting revenue, the looming tax changes
in Britain are intended to punish the rich. President Obama has
the same attitude. He was told by a leading journalist last year
that the reduction in capital gains tax rates by both President
Clinton (in 1998) and President Bush (in 2003) had been followed
by revenue increases. (And the stock market promptly boomed in
both cases.) Obama’s response was that that didn’t matter because
raising those tax rates was a matter of “fairness.”
Prediction: The performance of the British economy is set
to decline. In the last year the (London) FTSE 100 stock index
has largely mirrored the movement of the Dow Jones Industrial
average. Today, it costs $1.65 to buy a pound. That price will
surely decline. One caveat: If Obama and the Democrats succeed in
raising tax rates here next year, paralleling the changes
expected in Britain, then all bets are off. I doubt if that will
happen. But if it does, Obama can say goodbye to his Democratic
majority in Congress.
