WHILE being interviewed during the Liberal Democrat Conference, the great pious voice of our collective conscious, also known as Vince Cable, solemnly stated that the reduction of the uncompetitive taxes on the “rich” would have to wait. His reasoning was that a reduction in tax on the lowest paid would result in greater overall spending. This is voodoo economics.
The problem is that sustainable economies are not built on grocery sales, the most likely beneficial area of taking the poorest out of income tax. Growing economies are built on debt reduction and investment. While there are very good social reasons to increase income for the poor, it is now more important than ever that economic policy is based on what works, rather than what the self-proclaimed socially enlightened would like to work. It is politically incorrect to say so but marginally alleviating the poorest in our society is not the key to economic growth. Longer term, growth is the only answer to providing a sustainable reduction in unemployment and the means to help the poorest as a result.
What has a far better chance of working – and indeed has been shown to work – is incentivising through lower taxes those who control small and medium sized businesses. It is no surprise that the German economy is powered by the Mittelstand, the more than 3m mostly family owned and managed businesses. Such businesses have retained their flexibility and innovation. Should we not be trying to create the conditions to emulate the German model in the UK?
HMRC’s own figures for year 2010/11 put the number of taxpayers with total income higher than £150,000 at 326,000, 1.1 per cent of all taxpayers. However, only 39,000 have total incomes higher than £500,000. In total, the top earners already pay a hugely disproportionate share of total tax, estimated by HMRC at 45 per cent for the top 5 per cent and 27 per cent for the top 1 per cent. These figures do not include national insurance which again, with the adjustment to the ceiling, disproportionately hits higher earners.
It may well be that the Warren Buffetts of our world, the truly wealthy by any measure, are untroubled by excessive taxes. They are in fact a very small proportion of the “rich” targeted by the higher income tax bracket.
The market has judged the Fed’s latest action to reduce longer term interest rates as fiddling while Rome burns. Businesses increasingly mistrust the liquidity of their banks and banks eye warily the solvency of their peers. Rather than spending cash reserves, businesses and individuals are worried about what tomorrow may bring. The IMF and the World Bank have called attention to the critical issue of sentiment and the need to reverse the prevalent sense of impending catastrophe.
It is precisely here that unfair levels of taxation are most damaging. It is sentiment that can be influenced by the swift ending of the excessive taxes levied on those who own and those who manage our small and middle sized businesses. If the government truly feels the need to tax the “rich’’, then they should at least amend the tax bands so that only the truly wealthy are captured by it. If only the Conservative party would stand up and be counted in the coalition government.
Mark Speeks is a non-stipendiary Anglican Priest who has worked for many years in the City in corporate finance and fund management.