The great bidding war

Many general elections turn into bidding wars, and this election is certainly no exception.  Instead of proposing measures to grow the economy to the benefit of most sections of society, some parties vie to see how much money they can take away from a smaller group in order to hand some of it out to buy the votes of a larger group.

They promise largesse and nominate tax increases that they say will pay for it all.  Unfortunately, they never seem to have heard of a dynamic, as opposed to a static, economy, and seem unaware that taxation changes behavior.  So far we have seen proposed increases in Corporation tax and income tax hikes for high earners.  These have been variously promised to fund untold billions of extra spending on education, health, social care, public sector pay, and a raft of other things besides.

Critics have pointed out that the sums do not add up, but it is worse than that.  The proposed increases in Corporate tax and high earner income tax will almost certainly both lose revenue.  The steady reduction in Corporation tax, down from 28 percent to 19 percent, has seen huge increases in the revenue it generates, while the reduction in top rate income tax has not only increased revenue, but greatly increased the proportion of total income tax paid by high earners.  The top 1 percent of earners now contribute 27.5 percent of all income tax paid, while nearly half of the population pay no income tax at all.

Corporation tax falls on shareholders to some extent, and on labour to a much larger extent.  Higher tax rates lower investment and activity, and in some cases lead to relocations beyond the reach of the tax man.  Higher taxes on income reduce incentives and expansion, and encourage people to move away, while discouraging others from moving in. 

Increases in both of these lead to falls in revenue, so far from promising who will receive the imagined gains, those proposing the increases should be telling us how they intend to finance them.