At a CPS fringe event last night, there was plenty support in the audience for this principle. “Don’t you think it is worth the price?” he said. My point: we don’t know the price. Is it £800m, as the IFS says? £2bn? £5bn? The more it costs the Exchequer, the more nurses and social workers will have their pay squeezed and taxes increased. I put this to David Cameron in our interview last week: here is the transcript, with my comments in italics:
DC: I think in the short term it will raise some revenue and that is why, in the short term, because of the scale of the crisis, we cannot promise to get rid of it, but it’s a tax we don’t like, it’s a tax which should form up in the queue of taxes we would like to get rid of but we can’t make an early pledge to do so.
FN: Given that no independent researcher has ever said it will raise revenue, everybody says it will lose it - the IFS say £800 million, other ones say more than a few billion…
DC: Well the Treasury, and they would claim that their figures have some worth, claim that and I think that it is believable in the short term that it will raise some revenue. As I’ve said, it’s not something we think is a good idea but the scale of the fiscal crisis means that we cannot make an early pledge to get rid of it.
FN: Can I put to you that this suggests a worrying direction of travel? Many entrepreneurs are looking at you and asking ‘what is this guy all about, what is his understanding of wealth generation’? Rich people are leaving this country right now, and not because of what Labour will do. They know there is going to be a change of government and they think the Tories are for whatever reason, political or otherwise, pursuing a strategy where the rich are regarded as ATM machines - cash cows to be milked.
DC: Look, what we have to convince people of is that we understand wealth creation, we understand what drives a strong economy, how to help people establish new businesses, to create the wealth, create the jobs that are going to take us out of this recession. I don't think though that anyone would be convinced if we made tax pledges that aren’t deliverable and we made promises, particularly having identified the scale of this deficit, the scale that I do see as dangerous, having identified that all the efforts have got to go to dealing with that and therefore I don’t think it would be realistic to make tax pledges we can’t keep.
FN: But the 50p tax would lose revenue, not raise it, that will make the deficit worse, not better! Can nothing could change your mind about 50p, because this is a...
DC: Look. Clearly, Fraser, if you are proved right that it doesn’t raise any money and the Treasury is wrong then that would be, as they say, a fact on the ground.
FN: Okay. It will be my challenge to you to change your mind about that.
DC: You don’t have to persuade me that high marginal tax rates are a bad idea - I think they are a fantastically bad idea. Absolutely.
FN: But this could cost you billions.
DC: What I say is: if you’re right, we’ll see. If you’re right - that it raises no revenue, even in the short term - then clearly it would be painless and advantageous to get rid of it at an early stage.
[Note: the lag on behavioural tax data is such that one cannot tell, in the short term, if it is gaining or losing. You can bet that the take from the richest will be shown to fall, along with their declared earnings (as it did in California in 2001/2). But how much of that will be due to the recession (or, in California’s case, the dot-com crash) and how much due to a tax-induced behavioural switch? It takes years to untangle the data. And, by then, the golden geese have flown. Worse, emigration data is not collected in Britain. Studies into the impact of high taxes have to be conducted longitudinally - so Cameron could only know about the damage his 50p tax has done to his tax base long after the damage has been done and the poorest are shouldering a far greater burden. He’s kidding himself if he thinks he will know, in office, about all these foreigners who are offski. I didn’t say this in the interview, and moved on to another phrase he used recently.]
FN: You say recently the rich have to be seen to pay their ‘fair share’. Right now the richest 1% pay 24% of income tax collected. Would you describe that as a fair share?
DC: Look, I want a system which raises money effectively. I remember particularly in 1988 when rates were cut away down to 40%, there was a great revolution on the left and people said this is completely unfair but the subsequent figures, I remember promoting them at subsequent elections, showed that actually better off people were paying not just more income tax but a greater share of the income tax, so you don’t need to convince me about that. The sort of tax system that I believe in is one that’s effective in raising revenue - rather than one that is trying to make a particular point.
FN: The lesson, surely, is if you want to have the rich bearing a greater share of the tax burden you must reduce their marginal tax rate. It’s a paradox but that’s what been proven. And you say you not only understand this, but advanced the argument yourself.
DC: I am a Lawsonian. But I believe fiscal responsibility must come first. We have this enormous problem with the deficit, we must deal with that and prove that we are fair in dealing with it. Over time that will enable us to reduce some taxes and particularly those taxes we think aren’t effective.
[I dropped the subject here, although it really did strike me as an unresolved contradiction. Cameron appeared to be saying that he learned the lessons of the Lawson tax cut, which we looked at in this Coffee House post. So he is saying a) I know that high tax rates on the rich lead to small revenue but b) I’m going to do it anyway. I have made a pest of myself in this conference, trying to ask various Tory policymakers how they can resolve this. Oliver Letwin told me at a Politea fringe that “short term” is the key: that if they abolish the 50p tax early enough it will be a net contributor. I told him that was fascinating, and I hadn’t seen the studies suggesting this. Could he point them out to me? I love asking this question of the Tories, because they always go quiet and say something like “our researchers will, of course, have done all this” - which, translated, means: “I haven't got a clue”. Cameron pointing to the Treasury’s research (which we’re trying to get under FOI) seems to be about as far as it goes. The Tories are sold on the political attractions of the 50p tax, which I do not argue with. But little, if any, study seems to have been done into its fiscal impact. As far as I can determine, they have not commissioned (or even read) independent research into the effects of raising the marginal tax on the high paid - or sought to find out what the so-called elasticity (ie, tax-avoidance) effect might be.]