Free Lunch: Read my lips

Δημοσιεύθηκε: 22 Απριλίου 2015 - 11:02

Who's afraid of higher taxes?

In a campaign which is inordinately focused on the fiscal deficit, one astonishing fact has gone largely unnoticed: the number of Britons who want a bigger state.

You can close a deficit by cutting spending or by raising revenues (or both). The outgoing coalition government has overwhelmingly gone with the former and says it will continue to do so if re-elected - to the point where some think shrinking the state is the overarching goal. No major party, though all vow they will balance the books, is vocally offering the alternative solution for doing so: raising taxes sufficiently to cut spending significantly less or even increase it.

As the chart above from the British Social Attitudes survey shows, that means almost 40 per cent of voters have no electoral choice representing their preference on this headline policy issue. The Labour party prefers to emphasise all the taxes it will not raise (with some exceptions - see below). The Lib Dems are positioning themselves between the big two. (The Green party and the far-left fringe come with a lot of other baggage that most of the 40 per cent don't want. The SNP is only on the ballot in Scotland.)

The election strategists may judge that despite the large minority who want it, there is no chance of winning with a bigger-state platform. They may even be right. But that would be a serious democratic problem. The only objective justification that can be given for this sort of disenfranchisement is that it's a very bad economic choice that voters would not really want if they understood what it meant.

But that's not the case. The most common economic arguments for smaller government don't hold up, at least not in the UK case.

Take first the distortionary effects of higher taxes. According to the OECD, the UK government's share of the economy is modest by European standards, and quite a bit smaller than in many very productive economies including the Scandinavians, Germany and Luxembourg. Or take a more specific look at one of the few tax questions over which there is a genuine disagreement among major UK parties: the top rate of income tax. In a recent briefing from the London School of Economics, Alan Manning writes that raising tax from 45 to 50 per cent has highly uncertain, but small, effects on the public finances. But what is clear is that if the higher rate leads to a fall in the tax base (the Laffer curve effect), it is certainly not because the highly paid work less but because they put more effort into tax avoidance. Now all the parties promise to reduce the revenue loss from tax avoidance. But even if they fail, the implication is that a higher top rate of income tax does not have noxious effects on the economy.

And let's not forget that the British tax system is no paragon of rationality. As the excellent Mirrlees Review documented, there is great room for revenue-neutral reforms to make taxation more efficient. That of course entails there are ways to increase the tax take without harming the economy.

So much, then, for the damage a somewhat bigger government tax take would cause. What about the spending side? The second pillar of the case for limiting the state is that governments spend money badly. No doubt they often do, but the question is whether they spend money better than the private sector. And in some sectors the answer is clearly yes. The economics professor Mariana Mazzucato has documented the fundamental role of governments in innovation.

And Brad DeLong recently made a strong case for thinking that the optimal size of the state is larger in this century than in the previous. The reason is that the sectors in which markets typically fail - information-based goods and services (which are hard to value, cost less to reproduce, or both); and goods and services that have a big insurance component (healthcare) - are likely to become a bigger part of the economy than they were in the traditional manufacturing age. Of course, this could imply a shift in the priorities of the government - more provision of goods and services and less redistribution - rather than a greater overall size. But that question at least deserves to be posed. Meanwhile, even the UK government's spending on goods and services points in exactly the opposite direction from what DeLong recommends, as the chart below shows.

So perhaps we are back to the electability point. There may be no good economic reason to shrink the state, but history shows - so we're often told - that British voters do not in practice accept a tax take much higher than the 36 per cent of GDP the country is currently at. But that is simply false. Below is a chart of government receipts as a share of gross domestic product. For a third of the past 50 years, the tax take has been above 40 per cent. The post-1979 average is 38 per cent, and the average for Margaret Thatcher's government is 41 per cent.

So there would seem to be an electoral space to occupy for a party - presumably Labour - to articulate a vision of a modestly larger state. But that would require breaking with a Westminster dogma saying this is impossible. Much like Keynes' money managers, politicians prefer to fail conventionally than to succeed unconventionally.