Having A Laff

THURSDAY, OCTOBER 01, 2009

Having A Laff

Not enough jokes, but still interesting

Mr Cam is reportedly thinking about rescinding Gordo's tax rise for those earning over £150k pa.

Good. And let's hope his thinking doesn't take too long. Because the point about Gordo's new 50p tax rate is that it will almost certainly cost the government money.

Why?

Well, it's a textbook example of the famous Laffer Curve - the idea that beyond a certain point, increases in tax rates will reduce tax revenue, as individual taxpayers change their behaviour to escape the higher rates. In the words of theInstitute for Fiscal Studies, higher income tax rates incentivise taxpayers to "work less, retire earlier, emigrate, contribute more to pension or charity, convert income to capital gains, incorporate, and invest in tax avoidance".

Now, according to the government's own forecasts, the new 50p rate will raise £2.4bn pa, even after taking account of those behavioural responses on the part of taxpayers.

But according to the independent and authoritative IFS, it "could actually cost money".

For one thing, the IFS points out that the government's figures exclude the impact of the higher income tax on consumer spending. That will undoubtedly fall, cutting VAT and other indirect tax receipts "by up to £1.5 billion". Which slashes the government's £2.4bn revenue figure by over 60%.

The IFS has also done its own analysis of experience during the 1980s when the Thatcher government famously cut top income tax rates and saw a substantialrise in income tax revenues from higher rate taxpayers. They identify a muchstronger response than the government assumes.

Indeed, they estimate that the revenue maximising marginal income tax rate for those on incomes of £150k and above is just 41%.

Cutting the gobbledigook, the IFS is saying that Thatcher/Lawson's existing top 40% rate is more or less spot on the peak of the Laffer Curve, and any increase is likely to cost the government money.

Here's the IFS's stunning picture:

As we can see, whereas the IFS places the peak of the Laffer Curve for high earners at a marginal income tax rate around 40%, the government places it at well over 50%.

Now, who are you going to believe?

So given that Gordo's new tax is going to make his fiscal black hole even blacker and even deeper, you may be asking why he's going to do it?

You're not? Well, I'm going to tell you anyway.

You see - and brace yourself because this may come as a shock - our leader is an unreconstructed socialist. He not only believes that government is better at spending our money than we are ourselves, he also believes that high incomes for the few are A Bad Thing.

So although this measure will end up costing all of us, and although we'll all have to pay more taxes, and although we'll all be poorer as a result, we will benefit from knowing that the rich have been whacked good and hard. According to the IFS, there are only 350,000 of those bastards, and we all know they've got it coming. Think how much better we'll feel as we pay our own eye-watering taxes.

The thing is though, Mr Cam is not a socialist. If reports are to be believed, he's a Tory. And Tories... well, they're supposed to believe in prosperity and individual effort and enterprise and all that other stuff.

Aren't they?

Mrs T and I are off this weekend for a few days sunning ourselves on the glittering promenades of Manchester. Wouldn't it be great if George stood up and gave us another of those game changing speeches of his.

Tough On Big Ticket Items. Not.

Since Mad King Gordo reeled off his latest shopping list of new public spending commitments, we've been treated to a succession of Labour politicos thrashing around trying to explain how it will all be paid for.

The much-hyped Millipede (Ed) was particularly ludicrous on Newsnight, coming across as an earnest 16 year old Young Socialist who doesn't have the faintest idea how the real world works. Most ludicrously of all, he's the one in charge of Labour's election manifesto.

All we've been given is the tedious mantra that Labour will not shy away from"tough decisions".

But what decisions?

The only specific we got yesterday was that ID cards will not be compulsory. But we already knew that, and anyway it will save virtually nothing (we estimated £55m in 2010-11 - see this blog).

Tinkering around with ID cards and the like simply won't do it. If you're going to make real tough decisions, they have to involve Big Ticket Items.

And as it happens, we've recently had useful reports on three of the very items we have in mind - public sector pensions, the Trident replacement, and our planned new aircraft carriers.

On public sector pensions, Corin Taylor of the Institute of Directors has written a note (see here) responding to the TUC's entirely spurious claim that the pensions ticket isn't really all that big at all. And while the TUC claims they only cost taxpayers £4bn pa, in reality:

"... the cost of public sector pensions to taxpayers in 2009-10 is the sum of the employer contributions to the unfunded schemes (£12.961 billion), the Treasury top-up to the unfunded schemes (£4.118 billion), and the employer contributions to the funded Local Government Pension Scheme (£4.506 billion), which gives a total of £21.585 billion."

Now, £22bn pa is big ticket by any standard - getting on for £1000 pa for every single household. And it is an obvious area for tough decisions because, as we've blogged many times, the final salary pensions provided in the public sector are now way more generous than those available to the bulk of private sector employees.

True, we couldn't save the whole £22bn pa anytime soon, because most of it is going to pay pensions accrued long ago. But there's nothing to stop a toughdecision-maker cutting the employers' contributions by several bill and increasing the employees' contributions by the same amount right away.

Except that's a tough decision we know Labour will never take: their reliance on public sector union funding rules it out entirely.

Turning to Trident, we've been reading the paper published earlier this month by Greenpeace. Yes, we know - Greenpeace. But setting aside the propaganda, the paper is actually a rather good overview of just how big Trident's ticket is likely to be:

"The government gives two figures for replacing Trident. The first is the cost of designing and building new submarines, warheads and ‘infrastructure’. This was said in 2006 to be £15–20bn and to take up 3% of the defence budget every year between 2012–27.

On top of that are the running costs, which will take up around 5–6% of the defence budget (approximately £1.9–2.3bn) every year.

This gives a total of £72.9–89.5bn for building and operating a replacement for Trident."

So that's a range up to £90bn. But we all know about MOD budgets, so that will certainly be an underestimate.

Greenpeace reckons the true costs are closer to £100bn, once you take account of hidden items like the cost of upgrading the Atomic Weapons Establishment, and securing the nukes from terrorists and other wellwishers. And the MOD's dire record on cost overruns might suggest an even higher figure.

And then there are the carriers:

"The lifetime costs of the two supercarriers and their aircraft were estimated by government in 2005 to be £31bn, broken down as a £12bn procurement cost and £19bn running costs. Separate estimates of £10bn and £18bn have been given for buying and running the F35 planes."

So as per, confusion over what's actually included in the £31bn. But in any event, Greenpeace says the official numbers are serious underestimates, given that the cost of both ships and planes are known have spiralled since these numbers were published earlier in the decade.

So two more Very Big Ticket Items here.

And these at least are items you'd think Labour might be much happier to cut.

Except of course, these big naval construction jobs pay the wages for thousands of Labour voters up north.

In truth, Labour is pretty certain to announce defence cuts. But they won't be anything like the kind of clean cuts suggested by the term "tough decisions".

Instead, they will be a grubby compromise that keeps the maximum number of constituency jobs, but only at the cost of downsizing and despeccing both Trident and the carriers to the point of uselessness and probable danger (see comments here for the way that the new Type-45 destroyers are being fitted with decades old salvaged kit to save cash). Which will be the worst of both worlds.

So there we have it - three major spending areas where "tough decisions" won't even get a look in.

Hopeless and helpless.

Surely, Mr Cam must do better than that.



PS If you haven't read today's Sun editorial explaining why they've dumped Labour, you should. It's an excellent pocket catalogue of Labour failure: failed on law and order, failed on schools, failed on health, failed on immigration, failed our children, and failed our troops. No wonder poor Lord Kinnockio got so emotional on the wireless this morning.