Tax Cons

TUESDAY, NOVEMBER 18, 2008

Tax Cons

He'd have approved

We learned yesterday that what Gordo giveth, Gordo will be takething away pdq. Immediately after the next election, he'll be throwing the tax gears into reverse to claw back the "giveaway" we'll be getting next week.

But how can such a strategy possibly work? Surely we punters will see straight through it, recognising that such short-term tax cuts are not something we can safely go out and spend. We'll need to save them in order to pay the deferred tax hikes post-2010.

In fact, there's a whole branch of economic theory devoted to just such situations. It's called Ricardian Equivalence, after the great 19th Century economist David Ricardo. Pointing out that government borrowing is nothing more than deferred taxation, Ricardo suggested* that it therefore makes no economic difference whether government funds itself via tax or debt. People cannot be conned by tax cuts funded by borrowing.

So is Gordo's giveaway a gigantic con?

Yes. But not in the way Ricardo might have suggested*. In truth, the upcoming tax cuts should have quite a strong impact on demand in the economy, not immediately negated by an increase in saving. That's because those that get the biggest tax cuts now will not be the same as those who can expect the biggest taxincreases post-2010.

The main beneficiaries will be Gordo's favoured groups - in particular, families with children, lone parents, and those who have not saved. That is to say, they will be the welfare dependent groups who routinely consume more than they produce. Since they are very likely to spend every penny he gives them, he can rely on them to discharge their public duties in full.

The main payers post-2010 will be wealth producers and savers. These are the anti-social elements long reviled by forward thinking radicals. The bourgeoisie who think it's perfectly OK to save and accumulate personal wealth, and to ignore their wider duties to the state.

In other words this so-called tax giveaway is in reality a further massive extension to the discouragement of enterprise and effort Gordo has been working on ever since 1997. All implemented through his incomprehensible and wildly expensive tax credit system (see previous blogs too numerous to mention).

You might want to bear that in mind when you cast your vote in 2010.

*Footnote: In reality, Ricardo was far more subtle than the textbook version of Ricardian Equivalence might suggest. He understood that people are not rational calculating machines, and can easily get taken in by "fiscal illusion", under which immediate tax changes weigh more heavily in their minds than the eventual repayment of the associated government debt. Something that our politicos have always understood instinctively.