No. Wrong.

To save the economy, stop collecting taxes
The squeezed middle: An income tax holiday would be the best way to ease the strain and get Britain spending.

Nope.

A National Insurance tax holiday, just as Keynes himself suggested would be a good idea.

 

19 thoughts on “No. Wrong.”

  1. …..What difference does it make which tax you suspend?….

    Because not all taxes are created equal. A tax on employment, ie NI, has to be one of the worst.

  2. Why NI? Employees NI is income tax by another name, and employers NI is (according to the tax incidence rules often quoted here) borne entirely by the employee. Ergo NI in entirety is an income tax.

    Plus I really don’t think any of these schemes will work. Spending might go up a bit if taxes were cut, but people know its not a long term event. Taxes would go back up soon enough. So the money gained will either be used to pay down debt, or saved, or only spent on short term spending that can be stopped at short notice.

    It would just be another sugar rush boost of growth to the economy that would disappear immediately it was reversed.

    The point is we’re broke. Too much debt, public and private, and the only way out is the hard grind of paying it down, or defaulting one way or another. These sort of schemes just prolong the agony.

    Tim adds: OK, here’s the set up. Ricardian Equivalence doesn’t hold, not in its entirety (thus not all of it will be saved to pay future taxes). There is a multiplier. Thus we get more growth than just the spending of either the tax cut or of the government spending.

    Note that these are crucial Keynesian assumptions. So we are in Keynes world and we’re not going to argue against those rules of Keynes World.

    Now, what is the best way of getting the desired Keynesian stimulus into the economy?

    If we go off and spend then it takes time (oh, my, how much time!) to get the government behemoth actually spending money. There are no shovel ready projects. We also risk freezing the economy in its current state which is a problem if it’s partly a recalculation story rather than just and only inadequate demand. Finally, we always have the risk that a rise in spending is a permanent rise, not just one to deal with this lack of aggregate demand.

    So, let’s look at tax cuts. VAT? Expensive to do as everyone has to change prices. CGT, corporation tax etc? Takes a long time to feed through the system. These taxes aren’t usually due for 18 months. Income tax? Well, politically, that’s a tax cut to the rich, we might not want to do that (we’re in Keynes World, recall? Marginaly propensity to save/spend?).

    NI is very much like income tax, yes, but there’s a cap on it. So an NI cut feeds through directly into the wage packets of the lower paid. Plus, it takes a minimum of one week and a maximum of one month to feed through into the general economy.

    Thus, if you really were a Keynesian, really did think that aggregate demand (and not just “government is too small” or “Lots of spending on what I like!”) was the problem then you would argue that the way to deal with a slump in aggregate demand is a cutting of NI. It ticks all of your boxes. Fast, efficient, pro-poor and boosts aggregate demand.

    Which is why Keynes himself endorsed it.

  3. Tim, are you arguing on the basis that Keynes was right? He’s well known to have been wrong, and that there is no “multiplier”. So why argue on the basis of a wrong theory? That makes no sense. You may as well be discussing firefighting in terms of phlogiston.

    Tim adds: No, I’m not arguing that Keynes was right. Rather, I’m examining the implications of what you should be suggesting if he was right. It’s something we do a lot here. Take someone’s arguments at face value and then explore the implications of them. For example, if climate change is all as real as the IPCC says it is, are the Greens right in arguing for a reversal of globalisation? No, they’re not. The opposite is true in fact.

    It’s a useful way of distinguishing those who actually believe and understand the arguments they put forward and those who are using them as cover for some other desire or purpose. In this case, those who argue for NI reductions are beiong good Keynesians. Those who are using the Keynesian arguments to argue for more council houses, more windmills, more whatever spending, are using the K arguments as cover for their own, other, desires.

    It is, as one commenter said when I used the technique on another subject, a form of intellectual judo.

  4. Okay Tim, fair enough. You could also argue that the best policy would be to stop all government spending and prohibit/heavily tax all private investment, since that would push the multiplier (C/I) through the roof. 🙂

  5. Nonetheless, all taxes have the same effect ultimately, because money is fungible. It’s like trying to only fill one end of a swimming pool.

  6. Ian B, yes, but only eventually. NI is certainly much faster.

    Of course this is all just a “what if”, assuming that Keynes is right. If Hayek is right, then we’re better off slashing government spending.

  7. Ian B, yes, but only eventually.

    True, but it’s a pretty short term eventually. You give all this money to people with a high propensity to consume, supposedly, let’s say you really do that, and then they spend it, and now you’re on your second spending round and it’s in the hands of people whose propensity to consume is, on average, average. That was your stimulus, hope you enjoyed it, quick as it was.

    Give me a few thousand monopoly notes, and I’ll spend it ever so quick, promise. Whether the hookers and cocaine dealers will, I have no idea.

  8. And Hayek was right anyway. The thing people miss is that it’s not the magnitude of the taxes that is the problem, it’s the degree of economic misallocation due to government spending them that fuck the economy up; which is why some high tax economies do better than others. If your government spends most of the tax money on things people would have spent it on anyway, there might not be a great deal of harm. If it’s a British government on the other hand, you’re totally screwed.

  9. If the chancellor instead rebates some of the 2009 taxes, then that would be accounted for under 2009, I believe, with the deficit increasing then and not now, so his measures at deficit reduction would seem more effective.

  10. Why have NIC at all since it does not even come close to paying for what it is supposed to?

    Alternatively apply an NIC which truly reflects the expenditure then people can see how much their crummy NHS, Ponzi pension scheme and paying people not to earn their own living actually costs.

  11. It’s purely make-believe that NICs have anything to do with funding the NHS. However, they are the means of qualifying for old age pensions (and unemployment pay too, still?) so it is legit to set them against the cost of those. Insofar as there is any point, that is.

  12. How about cutting government spending and telling everybody who lives here that if they really want public services they are going to have to pay for them through taxes, and if they are on the public sector payroll, that they can only be paid a salary that is small enough that the bill doesn’t have to be foisted on our grandchildren, so if they aspire to a better standard of living, they are going to have to work for it.

  13. Thanks for the clarification, Tim, you’ve saved me reading a book there.

    My personal favorite is for the government to announce there will be no increase in tax or regulation for the remainder of their term and then piss off to the beach. I can dream.

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