The wealth tax.

So Clegg has come up with an idea that’s causing quite a storm. Let’s start with his own rationale for it:

If we are going to ask people for more sacrifices over a longer period of time, a longer period of belt tightening as a country, then we just have to make sure that people see it is being done as fairly and as progressively as possible.

So it’s a token gesture. That’s not even cynics twisting his words. He explicitly concedes that the appearance of fairness is the rationale.

Contra Jeremy Warner, then, fiscal hawks need not worry that this signals a new love of Keynesianism and stimulus by Clegg. He’s still totally on board with the project of deficit reduction. Again, in the man’s own words:

What people once thought might have been a short, sharp economic battle, a short, sharp recession, is clearly turning into a longer-term process of economic recovery and fiscal restraint.

Emphasis mine. Clegg doesn’t see this as part of a new strategy. The temporary rise in revenue intended as a token gesture of fairness would go towards paying off more debt.

You have to wonder, then, what Jonathan Portes means when he tweets that this is ‘good economics’. [Update: Portes clarifies his position in a comment below]. Ryan Bourne seems to be spot on in framing it as a non-proposal:

A temporary tax won’t solve a structural problem: The Coalition is trying to eliminate a structural deficit. If the Coalition agrees with the OBR that lots of the deficit is structural, then relying on a temporary tax to plug some of the gap will not help in the long-term…

It is so depressing to have to go through this debate all over again when the priority should be policies for growth. It’s doubly depressing when genuine tax reform proposals could form part of that growth agenda.

And Isabel Hardman, also at The Spectator, is surely right in suspecting Clegg’s real motive:

[The Lib Dem] conference theme is ‘fairer tax in tough times’, and both Clegg and Kramer repeatedly used the word ‘cohesion’ in their interviews. They were talking about social cohesion, but I suspect the main purpose of this announcement is to encourage cohesion within the Lib Dems and to encourage members to believe that their party would do so much more to make society fair if it weren’t for those nasty Tories.

But obviously Osborne can’t say that, so no wonder he’s fighting it by suggesting it would dampen the non-existent recovery by driving out job creators.

Taking the temperature of the blogosphere, the consensus seems to be that a long-term shift from income tax to wealth tax is a Good Thing. It’s less easily evaded, and even Tim Montgomerie deems it fairer. But that’s not what we’re dealing with here. It’s a temporary, friendly-looking news flash that does nothing to substantively reform the tax code, nor to change the direction of the government’s economic policy.

Which is sad, because if levied for the right reasons a temporary wealth tax could work wonders and be enormously wise. To return to Jeremy Warner for a second, you’ve got to admire the man’s bravado when he tries to bluff that:

There is no evidence whatsoever to support the suggestion that taxing people more, whether it be the wealthy, the middle classes or the poor, so that the government can spend the money instead, will add to growth. To the contrary, by undermining wealth creation, it is very likely to do the reverse.

Emphasis mine. Really? I guess that explains Mr. Stiglitz’ support for such an evidence-free proposal. Simon Wren-Lewis at Oxford has called a temporary tax rise to fund government spending – which is, if you think about it, debt-free stimulus – a ‘macroeconomic magic button’ which the chancellor will tragically not touch:

[A]n obvious problem with balanced budget fiscal expansion is that it increases the size of the state. Even though it is only temporary, as a Conservative this is not something you want to do. In addition, if one of the ‘benefits’ of a debt crisis is that it gives you a pretext to shrink the size of the state, then undertaking balanced budget fiscal expansion stops that goal being achieved. You would, in this sense, be wasting a crisis.

Making policy respond to ideology rather than facts is bad, but proposing policies for no real reason at all isn’t much better. If only Clegg had the magic button in mind when speaking to The Guardian today. Then this would be a debate worth having.

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2 thoughts on “The wealth tax.

  1. To be clear, I didn’t say Clegg’s specific proposal (if there is one, which doesn’t appear to be the case) was a good idea: I said that shifting the burden of taxation from income to wealth was sensible (of course this is very much consistent with what you say in the rest of your post, so I don’t think we disagree).

    I agree with Ryan that a temporary increase makes no sense (although not with the rest of his argument). Indeed, arguably it’s exactly the wrong way round; it would be better to announce now a permanent increase in wealth/property tax beginning in a couple of years (as Ian Mulheirn suggests in the FT today).

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