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December 23, 2005

Letwin on Redistribution.

Oliver Letwin has announced that the Tories are in favour of income redistribution:

The Tories should support the redistribution of wealth and try to narrow the gap between rich and poor, Oliver Letwin, the party's new policy chief, says today.

In an interview with The Daily Telegraph, he says: "Of course, inequality matters. Of course, it should be an aim to narrow the gap between rich and poor. It is more than a matter of safety nets."

Perhaps we should adopt the US moniker of RINO (Republicans in Name Only) and call them TINOs. Surely there is room for a party that says such redistribution is bunkum?

Now there is one way that I can see (and support) of changing the income distribution. Yes, change, rather than redistribute. My suggestion is that instead of money being raised in taxes to then be spent as our Lords and Masters desire, rather, taxes not be collected on a specific segment of the population.

If the aim is to reduce (post tax) income inequality, which is what is in fact suggested by all of these various schemes, why are we in fact collecting taxes from those we wish to redistribute to?

Far better to not incur the overheads and bureaucratic costs of the collection and spending in the first place.

Looking at 2001 (just because that’s the first figures I found) median income was 310 a week or a shade over 16k a year. Or perhaps we should take the poverty level, which is 60% of that median (with adjustments for household size, to be sure, too complex for this post) or just under 10k. Or perhaps Richard Layard’s point that more money does make us happier until we get to a 10k to 12k income level.

Whichever level we use, we simply shouldn’t be taxing incomes below those levels. Neither income tax nor NI. Yet income tax starts at around 5k a year and NI at something incredibly low like 60 quid a week. We have the completely absurd position whereby someone part time on minimum wage pays both income tax and NI. And receives benefits.

Whack the personal allowance up to 10, 12, 16 k a year. NI levels as well. The result will be a vastly more progressive tax system than what we currently have and a large change in post tax income distribution. Plus a large saving on the administrative costs of the way we currently do it.

Now, can anyone tell me why such a clearly sensible plan is not adopted? No, it’s not just because El Gordo likes fiddling with everyone’s pocketbook.

It’s because to do this we would have to shrink the State.

To balance this reduction in tax collected from the poor (I’m using lower than median income as shorthand for "poor") we would have to raise more in tax from those over median income. Much more. Tax rates would have to rise so much that there would be obvious disincentive effects, we’d almost certainly find ourselves going over to the wrong side of the Laffer Curve (yes kiddies, it really does exist. The argument is always about where we are on it, left or right of the peak, not whether the peak exists). Which means that we simply wouldn’t be able to squeeze more money out of those rich people.

Which would in turn mean that we’d actually have to start hacking away at some of the spending currently done by The State. This is a feature, not a bug, by the way.

Think of it this way. The analysis is that we have rich and poor and we should do something to close that gap. Currently we do it by taxing rich and poor and then spending the money, some going to the poor and much going to the rich (the middle classes get the biggest chunk of university spending, for example, the rich of arts subsidies).

Vastly better to not tax the poor, only tax the rich, and if there are limitations in how much we can squeeze out of the rich, so be it, we’ll simply have to spend less money.

Less post-tax income inequality, less bureaucracy, less intrusion into our lives and a smaller State. What’s wrong with that?

December 23, 2005 in Taxes | Permalink

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Comments

Nothing whatsoever, obviously, other than the fact that no-one has the courage to promote it.
Didn't Letwin go into hiding rather than answer questions about "cuts" during one election campaign??

Posted by: Chris | Dec 23, 2005 9:21:03 AM

Seems like he wasn't in hiding he was being re-educated in some sort of social-democrat re-programming camp.

The Remittance Man wanders off sadly singing:

"All I want for Xmas is a (proper) Tory Party"

Posted by: The Remittance Man | Dec 23, 2005 9:58:01 AM

I told you that Cameron was Bliar v2.

Posted by: Rob Read | Dec 23, 2005 11:14:24 AM

RM sings: "All I want for Xmas is a (proper) Tory Party"

Let's do it. A name first? Since the conservatives object to the name 'Tory', lets have that one. Only to make sure they don't object, how about 'The New Tory party'.

Posted by: APL | Dec 23, 2005 11:33:01 AM

The whole thing is just too, too depressing.

DK

Posted by: Devil's Kitchen | Dec 23, 2005 11:33:06 AM

Two points:

The article talks about "wealth", not income. They're not the same thing and looking at the context, it seems to me that they've paraphrased Letwin accurately.

and the Laffer Curve isn't like Tinkerbell; asking the children to believe in it isn't going to make it exist. The relationship between the tax system (which is much more than the marginal rate of income tax), behaviour and tax revenue is complicated, unlikely to be stable over time and unlikely to be independent of its history. It isn't well described as a "curve" for precisely the reason that describing it that way encourages you to say things like "we would definitely be on the other side of the Laffer Curve" when you have no idea whether or not that's the case.

(it's most likely not the case; the ASI proposal for a flat tax claimed that setting a £15k allowance would only cost £63bn which is about six and a half % of GDP; certainly well within the variance of the tax take over recent history. In order to believe what you're saying, we would have to believe that the current tax receipts were within 14% of the maximum amoung that could possibly be squeezed out of the UK economy, in which case God help us if there's a war.)

Tim adds: "God help us if there's a war". Odd. I didn’t take you for one of those who thought Iraq was just a police action or something.

Posted by: dsquared | Dec 23, 2005 11:59:14 AM

Wasn't the laffer curve proven to be a vast oversimplification ridden with inconsistencies as a valid proposition? even if you believed it, there was the problem of locating exactly where you are on the laffer curve. It might suggest more tax not less in some cases.

Yes more simple tax system, setting the tax limit higher would be very sensible. There would other positive side effects - I could see it increasing the labour supply for one, and on a flexible basis - some forms of part time work would be more attractive. Plus forms of job sharing etc could be more remunerative - good for some members of society. Also mebbes getting retired folks back into work. Which would ease the so-called pensions crisis too.

Far far too damn sensible!

Posted by: Angry Economist | Dec 23, 2005 12:09:52 PM

TIm; at the risk of not being in the spirit of the season I have been calling Cameron's ilk of Tories TINOS for quite a while now. The more I see from Cameron and his lot (and hear from various sources) the less I like. I think Wolfie was rather accurate in his satire of Cameron.

UKIP must be absolutely loving this...

Posted by: Andrew Ian Dodge | Dec 23, 2005 12:53:24 PM

Your policy will be unacceptable to the powers that be for two reasons.

1 They do not want to admit that NI is a tax.

2 They want benefits to be means tested.

James

Posted by: james C | Dec 23, 2005 3:01:51 PM

The obvious problem with your scheme is that it benefits the poor rather than the middle classes. This makes it politically unworkable. By "benefit" I mean not only obvous benefits such as services and cash, but pandering to their consciences and prejudices, such as providing the illusion of working socialism, or of helping the third world.

Posted by: Marcin Tustin | Dec 23, 2005 9:24:23 PM