I can remember arguing with a very distinguished economist that the tax burden on the poor should be reduced. He accepted that this might be morally desirable but he was adamant that it would have no affect on the wider economy because, he said, the poor do not spend enough to have an impact on overall economic activity. If you want to pull the country out of recession, he said, you must cut taxes for the better off. They are the ones whose consumption will make a difference.
So it may help the Tory image to say that they have halved income tax for the lowest paid, but it is unlikely to do anything to aid recovery. It is those who earn between about £40,000 and £60,000 per year whose decisions about whether to buy a new car or build an extension on the house will be immediately affected by a sudden increase in their take-home pay. They are the spending classes who buy goods and invest in services in large enough numbers to result directly in the growth of businesses and the creation of jobs.
Much as it would be lovely to believe it I\’m afraid that I don\’t. If stimulus there is to be it should indeed be going to the poor: or, indeed, to everyone. As Keynes himself was known to have said:
I am converted to your proposal…for varying rates of contributions in good and bad times. (June 16, 1942). Keynes, Collected Writings, vol. 27, p. 208.
…[Y]ou are able to show fluctuations in income of an order of magnitude which is significant in the context… So far as employees are concerned, reductions in contributions are more likely to lead to increased expenditure as compared with saving than a reduction in income tax would, and are free from the objection to a reduction in income tax that the wealthier classes would benefit disproportionately. At the same time, the reduction to employers, operating as a mitigation of the costs of production, will come in particularly helpfully in bad times. (July 1, 1942). Keynes, Collected Writings, vol. 27, p. 218.
Given that there is indeed a cap on employee contributions this is a nicely targetted tax cut. Everyone in work gets it (even those working part time on minimum wage) and no one making over about twice median wage gets any more of it. It\’s also stunningly fast to implement. The effects would be felt within 45 days of chaging the rates as money failed to be extracted from pay packets.
And we also avoid what is my greatest criticism of naive Keynesianism. That the solution to any ill could possibly be giving Ed Balls more of our money to spend. Which leads to, even if the fiscal stimulus argument does work, OK, let\’s do it quickly, by leaving more money fructifying in the pockets of the populace.
The only problem with this proposal is politics of course. The aim of going into politics is not to enable the populace to do more of what they want to do. It\’s to force them to do more of what you want them to do. So a policy of leaving them with more of their own money will not attract as much as one allowing you to spend more of their money. There\’s an asymmetric incentive there sadly.