In his opposition to the flat tax, Johann Hari says:
The debate now should be about how to make the British tax system far more progressive, with a 50 per cent top rate of tax and less dependence on indirect taxes like VAT that hit the poor hardest.
Let’s take him up. What would an argument for a more progressive tax system look like?
It would start with the philosophical case for higher taxes. Here, we’d argue against Nozick’s theory of self-ownership, that taxes are equivalent to forced labour. The strong arguments are:
1. Even if people do own themselves, they have no right to the world’s resources. If we assume these are jointly owned (rather than unowned, as Nozick presumes), then we have a right to tax the rich, because they are taking communally owned resources.
2. Our talents are, in Rawls’ phrase, “arbitrary from a moral point of view.” Even if footballers and hedge fund managers are entitled to their skills, they are not entitled to have been born into just that era when these skills happen to be in high demand. That’s a stroke of good luck for them. And behind a veil of ignorance, rational risk-averse people would have agreed to pool such fortunes to improve the position of the worse-off – that is, to pay high taxes if they happened to get lucky.
3. Income taxes replicate the insurance policies we would take out before we were born, if we could have done so. Taxes are the pay-out on these policies.
These arguments are, of course lifted from Cohen, Rawls and Dworkin. Proper egalitarians would develop them (and forget utilitarian nonsense).
The economic argument for higher tax would start from a curious fact – that Nigel Lawson’s cut in the top rate of tax from 60% to 40% in 1988 does not seem to have boosted economic growth.
Figures from here show that in the period 1988-2004, UK GDP grew by 2.1% a year and labour productivity grew by 1.6%.
How does this compare to the 16 years before the Lawson Budget? There’s no difference. GDP grew 2.1% a year and labour productivity 1.6%. Lower taxes on top earners did not raise economic growth one jot. The “Thatcher reforms” might have raised productivity (pdf), but these gains came from the earlier attack on trade union power, not from tax cuts for the rich.
Of course, this proves nothing; what we really need to know is what the economy would have done after 1988 with top tax rates at 60%. But it is suggestive. The macroeconomic benefits of lower marginal tax rates don’t leap out of the data.
And this is not the only evidence that high tax rates don’t hurt output. There’s also evidence that massive tax rates on the low-paid haven’t reduced labour supply.
Theory, of course, suggests several reasons why this might be:
1. People are motivated to work hard by status, not by post-tax incomes.
2. There’s an income effect as well as a substitution effect. If you tax the rich harder, the value of leisure rises, so they might work less. But they have to work longer to get the same post-tax income.
3. Higher marginal taxes might reduce effort that’s unproductive (in aggregate). They might deter rent-seeking and office politics, more than productive labour. This point doesn’t get the attention it deserves.
4. The scope for higher earners to reduce labour supply, even if they wanted to, is limited (at least in the short-term). There are very few part-time chief executives, or part-time derivatives traders. And many high earners are trapped into their jobs by school fees and (ex) wives. When I downshifted from the City to journalism 10 years ago, many of my former colleagues lamented that they could not do the same as me.
Of course, this argument is only a sketch. There are some obvious counter-arguments – though I doubt of any of you will guess what I think the strongest one is. But the fact is that the left can make a case for higher marginal taxes. So why don’t they?