"Don't Squeeze the Rich or Growth Rates Will Suffer" posted by Richard Seymour

Nick Herbert, director of Reform assures Guardian readers that taxing the rich does not work for social justice as it lowers GDP, and would place Britain in an uncompetitive position in relation to the rest of Europe and the US. Reform, for the uninitiated, is "an independent, non-party think tank whose mission is to set out a better way to deliver public services and economic prosperity", and it seems to support the centre-right wing of the Liberal Democrats in their crusade to return the party to its 19th Century position (which the Guardian strangely calls "radical"). They are against stringent regulation; against nationalisation; for extended involvement of the market in public services etc etc. Their hobby-horse today is the old trope that higher taxes lead to lower growth rates and therefore lower revenues. This argument is drawn from the long discredited Laffer Curve . The idea is simply that increasing taxes beyond a certain level (T) will cause people to work less hard, so that 100% taxation results in 0% willingness to work. However, most research shows that labour supply is inelastic in regard to tax levels. Empirically, the theory has proven a disaster. Clinton passed the largest tax increase in US history and revenues went up. W has passed tax cuts and revenues went down.

FY YTD Receipts YTD Expenditures
2000 1,533,369 1,356,829
2001 1,582,034 1,413,088
2002 1,401,499 1,517,811
2003 1,352,680 1,622,396
2004 1,400,288 1,726,905

High tax rates did not reduce growth in the long post-war boom. In fact, the relationship appears to be the converse - lower growth rates tend to pressure governments to reduce taxation (or, more accurately, to shift the burden of tax from business to consumer, from progressive to regressive).

The reasoning behind Herbert's argument is spurious at any rate, reflecting the growth fetish of economists rather than the needs of ordinary people. Social justice is a matter of how equitably and fairly wealth, resources and opportunity are distributed in an economy, not the rate of growth per person in the economy. Although it is true that historically higher growth rates have been conducive to more equal distribution of wealth, it is not necessarily the case that a rising tide lifts all boats. Although the British economy has expanded considerably since the last recession, the income gap has grown dramatically. Poverty spread throughout the 1990s, and the modest reduction in the statistics made by this government are more to do with minimal ameliorative measures and covert redistribution than tax rates. The Working Families Tax Credit is responsible for shifting many children just above the poverty line, while the minimum wage will have had an impact on adults over the age of 18.

The real question, of course, is not how much you tax but how you tax. If your concern is social justice, it makes sense (as Herbert does suggest) to cut taxes for lower incomes. One of the Socialist Alliance's policy proposals was to abolish taxes for anyone earning less than £13,000 per year. Similarly, given that there is only a finite amount of wealth in the economy, in order to achieve real distributive justice it would be a good idea to tax that wealth which is in the hands of those who have not earned it at a sufficient level to pay for social welfare and public service provisions, which is why the SA proposed to sharply increase taxes on the handful of wealthy people and on their chief sources of income: inheritance and capital.

The argument that we must never tax the rich too highly for fear of losing the benefits which they are in a unique position to deliver (capital investment) has always been disreputable one, especially when the argument is uttered by those with the capacity to make it happen. As Gerry Cohen points out (in If You're An Egalitarian, How Come You're So Rich?), it is rather like a kidnapper pointing out that it would be wise to forward large payments of cash in order to prevent the kidnapped from being harmed. Distributive justice may not necessarily involve an idea of 'desert', but even if it did, Herbert's argument would still be as morally offensive as it is theoretically impoverished.

The 'growth' blackmail never was a particularly compelling reason to persist with an unjust distribution of wealth and opportunity. It actually becomes less so when one considers the "competitiveness! angle of Herbert's argument, for what is actually implied by it is a race to the bottom. If one must maintain low taxes just in order to compete with Poland, how long before Poland cuts its taxes further and your competitive advantage is gone - forcing you to reciprocate and perhaps produce a similar reaction? Nations, if they must compete (and I fail to see how they will ever not do so) ought to compete over such things as human rights, opportunity, healthcare, education, social justice, cultural freedom and so on. Competing for the highest GDP per capita is senseless if it means the former are neglected.