This is the message delivered by our Chancellor, who claims that the modest upturn in Britain’s economic performance was caused by his cosmetic cuts in some tax rates.
In other words, well, see the title above. I’m sure when you first heard the news it hit you with the power of a nuclear blast. Your mouth stayed agape for hours and respiration was coming in stops and starts.
Now that you’ve got your breath back, here’s some more staggering news:
Night follows day. Water is wet. The sun is hot. Hold on, I’d better stop here lest you gasp yourself into a coma.
The point is that we don’t need politicians or economists to tell us something that’s blindingly obvious to anyone with a modicum of common sense.
In fact, whenever economics ventures into an area unreachable by common sense, it turns into self-perpetuating gibberish. For economics is nothing but a study of human behaviour at its most basic.
Everybody who wasn’t born rich knows he has to work hard in order to eat. That requirement satisfied, he needs to work even harder to create a better life for himself and his family.
Working hard is, well, hard. People need an incentive to do so, and the more of their money they get to keep, the greater the incentive to work harder and make more.
Hardly cutting-edge stuff, isn’t it? Neither is the simple deduction that the harder people work, the more they produce. And the more they produce, the higher the tax revenue they generate.
However, if the government gets greedy and tries to extract a higher percentage of people’s income in various taxes, the whole process begins to work in reverse.
People have less incentive to work hard, their output shrinks and so does the tax base. And when the government gets downright extortionist, the most enterprising and hardworking people flee for sunnier economic climes.
Seriously, do we need economists to tell us all this? Still, it’s nice when they do.
First came Arthur Laffer who made a startling observation. If you take two tax rates, 100 percent and 0 percent, they both produce the same tax revenue: zero.
Taking these two rates as the starting points, Laffer grabbed a napkin while having dinner with Reagan’s advisors and drew a curve plotting various points between the extremes. His conclusion was that the government would optimise its tax revenues at a flat tax rate somewhere between 17 and 20 percent.
Another American economist, Richard Rahn, drew another curve showing that when government spending increases beyond 20-25 percent of GDP, long-term economic growth will suffer.
The briefest of looks at the greatest economic success stories of recent times, especially those of the ‘Asian tigers’ Hong Kong, Singapore, South Korea and Taiwan, with Japan of 20 years ago thrown in for good measure, will vindicate both curves.
Those countries all kept their taxation reasonable and their government spending under 25 percent. Starting from an abysmally low point, in a few short post-war years they prospered to (or beyond) the level of the great industrial nations.
Similar, if lower-scale, stories were later told by some newly liberated Eastern European countries, such as Poland and Estonia.
Opposite and equally compelling examples have been provided by Hollande’s France where extortionist tax rates have driven every economic indicator down and the best income producers out, with London becoming the fifth largest French city.
Yet our Exchequer continues to defy both curves, if with slightly less vigour than under Labour.
Our public spending is somewhere around 45 percent of GDP, and actually higher if you discount some creative accounting practices for which all modern governments are so justly famous.
And middle classes, known to be the greatest producers of tax revenues, are being taxed at over half of their income, all in.
Rather than patting himself on the back, the Chancellor should try to explain why he still taxes and spends at a level incompatible with sound economic practices. Hasn’t he seen all those rather compelling curves? Why is he bucking human nature?
This is precisely the reason Keynesian economics fails. Keynes advocated a short-term boost in government spending as a way out of recession or stagnation.
The assumption is that the government will put the ailing economy on the intravenous drip of this powerful stimulant and, once the patient has recovered, it’ll pull the needle out. All fine in theory, but then human nature kicks in.
Any modern government will happily increase public spending. But reducing it would mean reducing its own power, and no modern politicians will accept that – it’ll go against their nature.
This brings us to the real reason all European governments continue to tax at such suicidal rates and spend at, or above, 50 percent of GDP. They don’t do this to increase the people’s economic performance. They do so to increase their control over the people.
There are three basic control techniques known to politics. One is slave-master, based on violence. Another is guru-flock, based on brainwashing persuasion. The third is parent-child, rooted in the latter’s dependence on the former. Most modern governments use all three, but in different proportions.
If we look at so called democracies, their principal crowd-control stratagem is burgeoning paternalism, underpinned by propaganda and thought control. Violence is kept in reserve, though it’s getting to be used more and more, with thought and word criminalised increasingly more often.
The most important part of paternalism is economic. Putting it crudely, the more of our money the government takes away and spends (in however wasteful a fashion), the greater our dependence on the state, and the greater its power over us. High taxes also have a punitive purpose: just like a parent uses a rod not to spoil an unruly child, so does the state use tax rates to punish those who dare try to be independent of it.
So Messrs Laffer, Rahn and their ilk can draw all the curves they want. They’ll run out of napkins before modern politicians run out of resolve to pursue their inner imperative – state, and therefore their own, power.