So, lower taxes for the rich it is then!

A standard part of the Keynesian analysis is that when you want to do a bit of fiscal boosting (which is, recall, just increasing the gap between what the government hands out and what it takes in) then, whether you\’re going to do it by handing out benefits or reducing taxes, you want to make sure that the cash is going to the poor, not the rich.

This is because of the marginal propensity to save: the rich are more likely to save a bit or a lot of what they get while the poor are more likely to save little to none of it. And as what you\’re trying to do is increase spending not saving, well, you can see why you would want to give it to the poor.

Good theory, fine, but however intuitive a theory is you do still have to check it against reality:

Those aged between 18 and 25 have been the worst affected showing the largest increase in debt level of any age category, as well as reporting the fastest falls in both their savings and willingness to spend.

Top earners, defined as those earning more than £57,751, are the most willing to spend what they have got, with their intention to spend hitting an 11-month high in November, compared to a record-low among the bottom three groups.

Oh.

What we find out there in the real world, away from that blackboard economics, is that the young and the poor seem less willing to spend while the comfortably off seem to have a greater propensity to spend. Which would mean that the appropriate Keynesian tax policy here would be, because it really is that spending we want to increase because we\’re good little Keynesians, to lower taxes on those comfortably off. In fact, we could even call on an analogy to the balanced budget multiplier here.

Because of that marginal propensity to spend, to not save, if you take money off the rich and give it to the poor, even if you\’ve not changed the overall fiscal stance, you\’ve still boosted aggregate demand.

Which means that, given these marginal propensities to spend/save being the inverse of what the theory states they should be, that the correct taxation policy is the inverse of what standard Keynesian theory states it should be.

What we should be doing therefore is raising VAT (a nice regressive tax which falls most harshly on the poor) to reduce income tax at the top end. Fortunately we\’ve a Tory government who would do this anyway but it\’s nice to see that it accords with Keynesian theory as well.

And the thing is, it really does accord with Keynesian theory. The entire idea of taking from the rich to give to the poor is based, when we\’re talking about fiscal stimulus, on that marginal propensity to save. If that is inverted (for whatever reason) then the appropriate tax policy is inverted.

I look forward to the Two Eds advocating the abolishment of the 50 p tax rate on fiscal stimulus grounds then. For they are politicians, honourable men, willing to change their minds when the facts change, are they not?

9 comments on “So, lower taxes for the rich it is then!

  1. Yeah but the enriched poor go out in their droves to buy the products of other workers like beer ,clothes and cheap cars increasing the spread of productivity: the rich buy collectibles and personal services (ahem) that don’t employ the people that mass-market factories do.
    This is the argument that goes: the rich geezer spends four times the amount of the poor geezer argument, therefore he needs protecting.Did n’t fly in 1900 when it was much in vogue.

  2. DBC – Where your contention fails is that the “mass-market factories” are nowadays based in China or similar. At least the “personal services” that the rich buy will have far more chance of being UK-based.

  3. I was rather proud that I noticed, when young, that self-proclaimed Keynesians cited Keynes only when his arguments supported what they wanted to do anyway, but never when they would have supported their opponents. Mind you, I suspect that Keynes took that line himself. He was terribly clever, but not a little slithery, I suspect.

  4. You can’t draw that conclusion from the survey. Just because “A willingness to make major purchases” is higher among the rich than the poor doesn’t mean they are spending more of their income on them.

  5. You can’t conclude that from this reported survey. As I read the Markit press release, there’s just a question about whether the respondent’s willingness to make a major purchase has gone up or down. You can’t leap from this to the conclusion that the average level of the mpc is higher for the rich than the poor. Even if the right thing is measured by this question, levels are not compared across income groups, as far as I can see, only changes since the last survey.

    Come on, there are quite enough blogs already that seek to overturn well-established economic regularities on the basis of impressionistic survey results.

  6. @RT
    Its the old adage that money, like dung ,does more good when spread thin.The crafstman or artist who created the collectible does n’t get paid the modern price being dead (or s/he would n’t be collectible).The modern price gets spread very narrowly but very thick.Most of it will go to the rich collector who sold it.Personal services are labour intensive not labour extensive.A few rich people’s needs or wants will not keep the mass of people in well-paid work.Rich people spend the same as poor people on bread,vegetables and the staples.Their personal spending cannot keep a whole economy going.The same money,spread around ,”Share the Wealth”, could support mass production and consumption of cheap goods largely through mechanisation which the spending-power of the rich does not promote.

  7. DBC Reed: “Most of it will go to the rich collector who sold it”

    And of course this collector will burn it, right, as will all those who work at the auction house.

    Fact is, the spending of ANYONE is not to “keep the mass of people in well paid work”. Jobs are a by-product of production. Period.

    If you say their personal spending cannot keep an economy going, why, pray, do so many think the taxes extracted from those same “rich” people will do so? Further, once the sticky, grubby, clumsy hands of the state have been all over that money, I suspect it will end up feeding bureaucrats not horny-handed sons of the soil.

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