Thursday, April 23, 2009

An alternative to cutting spending

As the National government slashes government spending in an effort to balance the books and offset the disastrous effects of their unaffordable giveaway to the rich, its worth remembering that there is another alternative: we could increase revenue by raising taxes on the rich.

The state of New York is doing this, hiking state income taxes by 1% on those earning over US$300,000, and 2% on those earning over half a million (a relative increase of about 30%), while the UK government has just hiked the top tax rate to 50% and eliminated various dodges the rich use. We could do the same, and introduce, say, a 45% rate on those earning over $100,000. From Treasury's 2008 detailed model data, this would bring in over $750 million a year (unfortunately as the table only goes up to $100,000, I can't model higher thresholds). That's $750 million we won't have to cut from our spending on health, education, welfare and roads - and $750 million we won't have to borrow.

This move would not be contractionary, because the rich tend to stick their money in the bank (or in a housing bubble) rather than spending it. And while they will squeal and posture and spam tiresome homilies and bogus graphs and threaten to leave, those threats are vastly overstated. Very few people will leave the country over an extra 8% marginal tax rate. Labour's imposition of a new top tax rate in 2000 did not cause the threatened crash in revenue, and neither will this. Instead, it will help balance the books while helping to reduce the inequality which is fundamentally harmful to everyone in our society - and that can only be a Good Thing.