Tuesday, 9 July 2013

"Evidence-based policy"

Ryan Bourne from the Centre for Policy Studies, who are as guilty of policy-based evidence as anybody else ("we can't have a Mansion Tax because there are a few hundred Poor Widows In Mansion and it is beyond the wit of mankind to think up some sort of deferment or exemption scheme") misses some good points in an article in today's City AM Forum:

... evidence-based policy tells you nothing about the assumptions behind what you are trying to achieve. This often means policymakers from left and right speak across each other on the same issue. A recent paper from Karel Mertens of Cornell University, for example, showed that marginal tax rate cuts enhance economic growth but also widen pre-tax income inequality.

Now, everyone pays lip service for the need for more to be done to "boost growth", yet there has been a strange dearth of left-wing economists or commentators holding up the paper as a guide to policy.

Why? At best they have a different idea of what is important. If your aim is to minimise inequality, the above research has hugely different policy implications than if you want to maximise growth.

There is no conflict here - provided you are working with real life facts (aka "evidence") and the facts are that even though marginal rates of income tax on high earners are far, far too high, the effective marginal rates on low earners are far, far higher.

So by all means, reduce the overall top marginal rate (including stealth taxes like NIC and VAT) to something a bit more humane (say 50%), this would boost growth (we will take this as a given and assume it to be A Good Thing), it would boost the net income of high earners by a quarter (which some see as A Good Thing and others as A Bad Thing) but... it would also more than double the net income of low earners (which must be a A Good Thing).


paulc156 said...

Isn't NIC incredibly regressive starting at high rates for those on relatively low pay and reducing sharply on incremental incomes above the basic rate of tax. Sort of the reverse to income tax. Is there some kind of justification for this perverse design in the first place?

Mark Wadsworth said...

PC, correct. NIC is regressive, probably VAT too and income tax is progressive.

The justification is "because they can get away with it" (it goes back to the old lie about NIC being 'insurance' or 'a stamp' and not simply a tax).

So if you bundle in all three together, marginal rates are quite similar (and quite high) all the way up the spectrum - something like 80% for low earners, 50% for middle earners and 65% for high earners.

Bayard said...

Were NI payments ever ring-fenced and if so, when was the pot first robbed by the Treasury?

Mark Wadsworth said...

B, probably not, but by and large, a pay-as-you-go system is cheapest and best, provided the government (and recipients) are honest about it.