Tuesday 25 November 2008, 10:46AM
The principle of progressive taxation
Source: BBC News website
As far as pre-Budget reports are concerned, yesterday’s statement by Chancellor Alistair Darling was rather exciting. It was a truly progressive, genuinely radical set of fiscal policies of the type I have only read about in political history and economics textbooks (many years ago I was, at least for a few terms, an economics undergraduate).
To attempt to confront the incipient recession the government is cutting our taxes and increasing public sector spending. It’s an old fashioned Keynesian fiscal stimulus of the type that was supposed to have been consigned to history by the Thatcher and Reagan governments of the 1980s. They argued that government couldn’t do much to help in difficult times: the market should be left to correct itself, its mechanisms oiled by the occasional interest rate cut and tax cut, focused on the wealthiest. The focus had to be on balancing the books and getting the government out of the way, and allowing high earners to generate wealth that would trickle down to the rest of us.
The Chancellor’s statement yesterday did the opposite: the Government is injecting about £20 billion into the economy at a time when its revenues are falling, and has targeted tax cuts at the poorest at the expense of the rich. Amongst other measures, VAT is being cut to encourage spending amongst people on low incomes, and the top tax rate (for those earning more than £150,000 a year) will go up to 45%.
I have to admit that the projection that the national debt is going to double to unprecedented levels over the next year is quite scary, and I don’t believe in a return to pre-1980s top band tax rates of more than 80%. But I think it must be right and fair that in economic downturns help must be targeted at those most vulnerable: people on low to middling incomes. And that the cost of economic stimulus should be funded, at least in part, by redistributing income from those who can afford to pay. My fear is that if this package doesn’t work it will lead to a retrenchment of neo-Thatcherite supply side economics: big tax cuts for those at the top in the hope that some of their wealth will find its way to the poor. But the principle of what the Government is trying to do is surely right, and it is encouraging to see a Labour administration doing what left of centre parties are elected to do.
Comments (3)
1 Jean ~ Tuesday 25 November 2008, 6:33PM
I’m not an economist and have only a dim understanding of these matters but I did watch 2 programmes about the Wall Street crash and the great depression which followed. The first was Alistair Cook’s AMERICA describing that time. The other was a documentary of the same event using some of the same film. What stuck in my memory was the comment that both Sweden and then the US spent their way out of recession while the UK did not and took much longer to recover. It sounds as though this Government has learned the lesson!
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