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.
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?