Friday, 2 April 2010

Even the Blair years showed the benefits for all of low taxes, so why are we going back?

Henry Campbell-Bannerman said in 1903 as Liberal leader of the opposition: "To dispute free trade, after fifty years' experience of it, is like disputing the law of gravitation."

At the time he was railing against the Tories' colonial secretary Joseph Chamberlain calling for protectionist tariffs.

The Conservatives have since learned from their mistakes regarding protectionism - we are now proudly a free-trade and free-market party, carrying the torch of classical Liberalism into the 21st century.

The Liberal Democrats seem to have forgotten these lessons they once so passionately taught us, while Labour seem to be suffering from learning difficulties.

Take for example the 50p tax rate, introduced this month. One financial crisis is all it took for Labour to return to their old unfounded, disproved prejudices regarding taxation.

Geoffrey Howe and Nigel Lawson's incremental reductions in the top rate of tax from 83% in 1979 to 40% in 1988 cemented the growth of the British economy after the Thatcher years (with a minor blip in the early '90s) and greatly increased the wealth of the nation.

Figures published in yesterday's Financial Times from the Institute of Fiscal Studies (IFS) show how this new orthodoxy continued under Blair and, crucially, remained the most effective means of redistributing wealth.

The IFS contrasted Labour's taxation plans in the 1992 election under Neil Kinnock and John Smith with the actual results under Blair and Brown between 1997 and 2010.

As alarming then as it sounds now, Labour planned to impose a 50p tax rate for all earnings above £36,375 - that's still only £56,000 in today's money. Yet by their own figures, the poorest in society could only hope to gain an extra £2 a week.

By contrast, since 1997 the poorest two deciles of society have seen their incomes rise by more than 10%. For the richest, their incomes have shrunk by around the same amount.

To dispute low taxation then, after thirty years' experience of it, is like disputing the shape of the earth.

But the first economic crisis Labour have had to deal with since the one they created in the '70s has exposed them for the flat-earthists they are. They simply cannot learn from their mistakes or, it seems, their successes.

As a small aside, the Financial Times claimed on the same page that levels of disposable income have greatly declined under Labour. According to the report,

The slowdown in household income has come as the population has increased fairly rapidly, but also as wages and salaries have been stagnant in spite of big rises in profits at companies.

Could this slowdown be a consequence of the minimum wage? After all, if firms have to pay their employees more, they are going to employ less of them. This increases unemployment (and with it, benefit payments) while those who are in work are heaped with greater and greater responsibilities - most likely less productively because of the stress they are under.

Businesses, refusing to see their profits shrink, come under pressure to compensate for this through further firing, slave-driving and generally treating their staff badly, perpetuating the cycle.

The minimum wage may go up every year, but it would not surprise me if the £5.80 received today is worth less in real terms than the £3 workers would have received before 1997.

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