I posted a new YouTube video this morning in which I argue that politicians refuse to tax the wealthy because, they say, they might run away if they're taxed, and we'd all be worse off. Except, the opposite is true. Redistributing wealth is the way to deliver growth in an economy like that the UK has at present. When will they get the message?
The transcript is:
You have to tax wealth to grow an economy.
I know that might sound perverse and, to most people, even illogical, but it is a straightforward statement of fact. Any economy that wants to grow has to tax the wealthiest in that community quite heavily and then redistribute the proceeds to the lowest earners in that country if it wants to grow.
Now, I stress this is not a statement of opinion. It is a statement of economic fact and the logic is quite straightforward. The wealthy are wealthy because they do not spend all their income. They save. That's how they accumulate wealth. This really should not be seen as anything very surprising. The trouble is that savings do not boost our economy, whatever our politicians, our Treasury, and those in the Bank of England might think.
Instead, they save. Savings withdraw funds from active use within an economy, and as such, they deflate an economy as a result.
And savings do not fund investment. Bank credit does that.
Nor do savings fund investment by companies*. Almost no company now issues shares for this reason anymore. They only issue them for merger and acquisition activity.
As a result, the wealthy, by saving their income, reduce the level of economic activity in a country. That's an unavoidable fact.
In contrast, those on the lowest incomes in a country tend to spend everything that they earn. Sometimes, in fact, they do more than that. They borrow to fund their current spending out of future earnings.
And what's more, as their earnings rise, they are more inclined to borrow to fund their income now out of future earnings because their capacity to borrow has grown.
So there are two obvious consequences. First, taxing the wealthiest people in the country makes sense.
They've got the capacity to pay.
Taxing them more is unlikely to reduce the amount that they spend in the economy because they're already saving, and taxing them will therefore not harm growth.
Then redistributing the proceeds from taxing the wealthiest to those on the lowest incomes also makes sense. This will increase the amount those on the lowest incomes spend, and almost all of any increase that they get will go on increased consumption to meet their needs. And, therefore it follows that they will fuel growth because that's what their additional spending will do.
So, if you want to grow an economy you have to tax the wealthiest in the community more and redistribute the benefits of the sums raised to those on the lowest incomes. The demand for goods, services, innovation, and investment in that community will always increase as a result of doing so.
This, as I've said before, is a straightforward statement of fact. Now, in that case, why, if every economist knows this, and I think every economist should know this, why doesn't every politician know this, and why are so many people in denial of this?
Are they not telling the truth?
Are they only serving the interests of the rich?
Aren't they interested in helping those on low income?
And aren't they interested in growth?
Those are the obvious questions to ask of those politicians who are in denial of this fact.
But, I also want to put all this in context, and I will use the simple example of a situation where politicians are currently getting this horribly wrong.
Labour is saying that it cannot remove the two-child benefit cap at present. This was introduced by George Osborne to supposedly encourage people to return to work rather than have more children, and he wanted to stop the assistance from the state to large families as a consequence.
The policy has not worked. The birth rate has not changed. Those being penalised are very largely already at work. We just have one million more children and their families in poverty as a consequence of this policy.
Now, what should Labour be doing? It should be increasing tax on the wealthiest. There are lots of ways in which I suggest that we can do this in the Taxing Wealth Report.
It should be removing the two-child benefit cap. And it should be considering what other benefit changes it could make.
How much would removing the benefit cap cost? The highest figure that I've been able to find is £1.8 billion. That's a figure provided by Save the Children.
How much would removing higher rate tax relief on pensions raise a year? £14.5 billion in my estimate.
In other words, simply by reducing the state's subsidy to the savings of the wealthy, we could fund the removal of the two-child benefit cap almost eight times over in my quick mental arithmetic.
However, Labour thinks it's more important to subsidise the savings of the wealthy than it is to take children out of poverty. I don't know why, but it's time they changed their minds. And if they did, they'd also get the growth that they crave.
* And yes, I know about the new share issue from National Grid - which is a total exception.
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Since government deficits create money (savings, wealth) and taxes destroy money (savings, wealth), wouldn’t it also be beneficial if government policy and legislation prevented the transfer of the government created savings from the many to the few in the first place.
That way, the benefit of government spending stays with the many. Taxing the wealth after it has been transferred to the few still leaves the many impoverished.
Allowing the wealth to be accumulated by the few and then taxing it back to be spent on the many seems circular to me.
How?
People’s circumstances change. Fiscal policy needs to be adaptable to these.
I think your argument sounds too much like a Robin Hood fairy tale. The government doesn’t tax the rich to provide for the poor. The wealthy typically do not like holding money. They spend it on hard assets like property, financial products. The only opportunity to tax the wealthy is when they receive income from these assets, or when they purchase them. Tax them the same as any other member of society and end their special privileges.
I think you need to read the Taxing Wealth Report
Marxist nonsense, Labour have got themselves in a position where they are finally electable after the Corbyn debacle.. i don’t think labour is the right party for you, you should look elsewhere.
I am far from a Marxist, being a firm believer in the mixed economy.
So, now tell me why Labour should not believe in greater equality?
On what basis have you deduced that Richard is a Labour supporter? Please try to understand what you are reading without making stupid assumptions.
@Steven
Do grow up.
The sad old Marxist gibe is a particularly ignorant right wing trope, especially when abused by militant, power at any cost, centrists.
The Labour theory of value still has considerable merit, as does much of his writing on the impacts of technological development, for example.
And if you are in the reactionary camp that thinks that Keynesianism is Marxist and FDR was a “commie” for the New Deal, as are so many who spit out “Marxist” as automatically pejorative, then you are utterly beyond redemption for rational discussion.
What do you know about Marxism? Have you read ” Das Kapital’ for example? What do you know about Capitalism? China is Marxist. It is also a Capitalist world power. I doubt if you can explain either. Don’t go there, laddie, unless you really know what you are talking about, which on the evidence so far I doubt.
Gary Stevenson (ex financial trader) has some good videos on wealth inequality. Search for “inequality” on his YouTube channel. https://www.youtube.com/@garyseconomics/videos
I think his heart is in the right place. He is a political advocate for taxation and in a way that is more helpful than saying we need “taxation to fund services”. I am on board with his slogan; “If we don’t tax the rich they will take everything.”
I am not entirely sure that he has helped his audience understand the difference between taxing the wealthy being and a tax wealth. However, that is not his job.
Is there any mechanism, other than progressive taxation, that acts as a counterflow to trickle-up economics?
Earnings caps (almost impossible to apply), comoetiti9n regulation, denial of tax relief on high earnings. But tax works best.
A quick google suggests there are 2,849,000 millionaires in the UK. There are also about 42million of working age. If we took an extra £1000 from each millionaire in tax – a sum that is completely insignificant to them and currently sitting “dead” in a savings account or equivalent, as Richard points out, and spread it out to each working age person, that would give them about £67 each, which again as Richard points out, is most likely to be spent into the economy, so giving GDP a boost of 2,849,000,000 – or nearly 3 billion. Do that once a month – after all the millionaires will really not notice, and that’s 30billion of money being spent around the economy each year with no noticeable cost to anyone.
I think that’s a little simplistic re tax, but the idea of circulating money works.
“And savings do not fund investment. Bank credit does that.”
But you have been insisting that Thames Water is bust because it has too much debt and not enough equity?
How can you reconcile the two statements?
Just read what you just wrote
I think you should be able to answer that ine for yourself
Why have 20% tax relief on pension contributions at all, for anyone, ever.
You’ve got surplus income if you’re paying into a pension so you’re wealthy, and the state will provide a Pension Guarantee (PCGC) if you reach the relevant age and need welfare assistance.
You are addressing a top 1% versus a top 10% issue I’m afraid.
I am suggesting what is politically possible
You are not
Richard
As you have pointed out firstly virtually nobody pays higher rate tax in retirement AND restricting tax relief on Pensions would fund an increase of about £1000pa for all pensioners, it seems to be a very easy policy to sell
Proppa Pig
Have you never heard of auto enrolment into pension schemes, under which anyone being paid £10,000 per year MUST be enrolled into a pension scheme, even though someone being paid £10,000 per year is most unlikely to be able to afford to live, let alone contribute to a pension scheme!
I suspect auto enrolment is a giant ponzi scheme
Troll with name of poppa pig expects to be taken seriously; presumably because he or she is a) plain daft, b) does not possess the rudiments of confidence in the prejudice they propagandise, and c) do not even take him/herself seriously. No wonder the Conservative MPs are bailing out like the proverbial rats deserting the sinking ship.
BBC interviewers incapable or unwilling to ask Starmer how he expects revising the planning system (to allow more building on the green/gray belt) – to get the economy growing, when it might be much easier by getting the rich to pay their fair share of tax
Neoliberal monsters need to stick together!
If there was lots of unemployment, giving money to poorer people who spend most of it would give the quickest and most certain boost to demand and economic output. But in those circumstances the government could just give them the money: it doesn’t need to tax the wealthy, and in fact doing so would dilute the effectiveness of the policy.
In a fully employed economy like the UK right now, giving money to poorer people will increase current consumption, but there’s no ability to increase total output. More consumption has to mean lower capital formation (investment) and so slower future growth. Taxing the wealthy will help balance “the books” and the real economy, but it will damage long term growth.
It’s legitimate to want to tax the wealthy to help the poor for Robin Hood reasons. But it’s wrong to argue that this will somehow increase economic growth – the opposite is the case.
We are a massive way from a full employment economy
We have massive underemployment
We have the capacity to create vastly more
And we do need to tax the wealthy – to tackle inequality
I simply do not agree with your assumptions – you are assuming we are in an optimal position – and we are very, very far from that
It seems that maybe the infamous ‘trickle down’ effect needs to have some form of measurement as opposed to the usual sincere expression hot air of it’s supposed benefits. I’ve no idea if such a measure exists, but if not then maybe a velocity of money measure might help highlight how as it lowers, that indicates a general increase in the hoarding of money by those that just add more to their existing pile rather than have it trickle down. Just a thought.
https://fred.stlouisfed.org/series/M2V
That change has much to do with QE
The role of pension funds needs to be taken into account. They clearly invest savings but how logically do they actually invest to maximise income for retirees?
Richard it would seem that Labour believes the loanable funds fallacy. That is if they tax the rich we will not have enough funds to invest in growth etc.
Agreed