Thursday, 8 September 2011

Economists disagree shock

This should come as no great surprise, indeed it could apply to any group of experts. However, I was interested to see that my colleague Mark Harrison (with whom I taught Making of Economic Policy last academic year) was one of the signatories of the letter from 20 economists in the Financial Times yesterday arguing that the 50 per cent tax rate was damaging to the economy. Today there is a reply from Andrew Oswald also in the Economics department at Warwick, although currently based in Bonn and best known as a happiness guru.

Oswald points out that the signatories produce no evidence to support their case and states that what evidence there is points in the opposite direction. The evidence that Oswald cites seems a bit limited as it is based on a case study of a tax hike in New Jersey.

In another letter, Alan Manning of LSE points out that a study of footballers, plausibly the most mobile of professions, did find that tax rates influenced location decisions, but the effect was not large and the research concluded that the revenue-maximising tax rate was well in excess of 50 per cent.

Of course one could argue that the 50 per cent rate sends out a signal about whether Britain is 'open for business'. Its main effect may not be inducing relocation, but dissuading location in the first place.

In any case the tax has not been in place long enough for its effects to be properly studied, although the Treasury is trying to make some calculations. One of the considerations has to be whether it encourages the use of tax avoidance devices.

Of course in many respects what the tax is about is political symbolism. It is a seen as a gesture towards 'fairness', although whether it does promote fairness is another matter. But withdrawing it would be politically costly when median incomes are being squeezed.

If the goal is revenue maximisation, then it is arguable that property taxes are more efficient and less distortive. A 'mansion tax', a 1 per cent levy on the amount by which a property's value exceeds £2m, would generate enough revenue to replace the mansion tax. But it might be politically difficult for many Conservatives.

2 comments:

Mark Harrison said...

As Wyn points out, it is no surprise to find that economists disagree. Wyn and I teach on our course that the world is complex; we often remain uncertain about exactly how causation works, even long after the event. Uncertainty is not the same as total ignorance, however. While the letter that I signed emphasized the tax competition argument against the 50p tax rate, I supported the argument on other grounds for which there exist clear empirical foundations.

My space here is limited, so I'm only going to give four headlines:

(1) Higher income taxes are particularly damaging to economic growth (├ůsa Johansson, Christopher Heady, Jens Arnold, Bert Brys, and Laura Vartia, "Tax and Economic Growth," OECD Economics Department Working Paper No. 620 (2008)).

(2) Temporary and uncertain taxes can inhibit economic recovery from a depression (Robert V. Higgs, "Regime Uncertainty: Why the Great Depression Lasted So Long and Why Prosperity Resumed after the War," The Independent Review 1(4) (1997), pp. 561-590).

(3) Temporary tax cuts do nothing for the overall level of demand (John Taylor at http://johnbtaylorsblog.blogspot.com/2010/10/cash-for-clunkers-in-macro-context.html).

(4) Some rich people bear some responsibility for the mess we are in, but collective punishment is wrong, and our political leaders should share the blame (Raghuram Rajan, Fault Lines: How Hidden Fractures Still Threaten the World Economy (Princeton: Princeton University Press 2009)).

Because economic causation is uncertain, there is also contrary evidence. I place particular emphasis on the evidence I've selected, partly because I regard those that have collected it as fine scholars.

I make these points in more detail on my own blog at http://blogs.warwick.ac.uk/markharrison/entry/the_evidence_against/.

Anonymous said...

As the divide between the rich and the rest reaches record highs, as the gains in equality of the past half-century are wiped out, it seems the influence of the wealthy on the political agenda rises disproportionately. Consequently, we are now told that whatever is good the rich must be good for the rest of us. We should be worrying about youth unemployment and stagnating wages for ordinary people, not tax cuts for super-rich. Britain seems to be heading towards an American-style plutocracy, justified using the language of technocrats. Outrageous and Tragic.