Taxing the rich even further to fund government spending is a bad idea

Reversing austerity means hitting its main beneficiaries: middle-earners and pensioners

I have to hand it to Zack Polanski, the recently-selected leader of the Green Party in England and Wales: I underestimated him. He won that selection by an overwhelming margin. He pops up on regular media all the time, creating a symbiotic relationship with his high profile on social media, and leading to a surge in Green Party support, as measured in membership and opinion poll ratings. He has completely eclipsed the attempt to establish a new party on the left by Zara Sultana and other MPs. There are lots of interesting things to say about Mr Polanski’s rise and potential future, but for now I want to focus on his central message, which has gained traction on the left. It is this: there is no need to raise taxes on those with middle incomes in order to finance ambitious plans on public services, maintaining and extending benefits, and accelerating the green energy transition. You can do by raising taxes on the rich, and especially on their assets.

This idea is based on the following logic: starting with noting high levels of inequality in wealth and income. The benefits of economic growth, such as they are, are largely being channelled towards the well off. This is corrosive to society and does not improve overall economic efficiency. But it also creates a huge pool of assets that only needs to be taxed a little bit (proportionately) to transform public finances. All of those statements can be challenged, especially if we are talking about the UK rather than America, but let us take them as read for now. Taxing the rich helps both rebalance inequality as well as resolving the seemingly permanent headache of public finances.

Journalists at The Economist and the Financial Times argue strongly against this: but with their readership representing those who are very rich, aspire to be very rich, or who make respectable livings servicing them, they would wouldn’t they? They point to the fluidity of the assets of the wealthy, and how trying to tax them is much harder than it looks. They also suggest that the economy would be hurt by rich people fleeing the country - and indeed less respectable organs of the right, such as the Daily Telegraph, publicise highly exaggerated stories of this happening already. These arguments can be challenged, though I personally think they have some basis. It is part of a political ideology that is uninterested in helping capitalism succeed, and therefore generally careless about the economic efficiency which underpins all prosperous societies. But there are other good reasons why I think the idea of taxing the rich and leaving others alone is a bad idea.

The first reason is macroeconomic: it’s likely to be inflationary. The wealthy spend a lower proportion of their income on goods and services than poorer people. Taxing rich people to give to poorer ones is likely to cause an increase in consumption overall, and the more extreme this policy is, the greater the inflationary effect. If Robin Hood keeps giving his takings to the poor of Sherwood Forest, the result will be that the price of bread goes up and the poor won’t be much better off. If the economy has spare capacity, this transfer may be to the good. Indeed high amounts of the national income going to rich people can be a drag on the overall economy because of excessive saving - if this is paired with a lack of investment too, which it generally is. But that is not what the general situation of the British economy is. Incidentally, this argument does not apply if the additional tax is simply used to reduce the budget deficit and either repay government debt or reduce the rate at which it accumulates. If the current government does go after rich people in the forthcoming Budget, that is likely to be the scope. However Mr Polanski is pushing something much more radical: he wants to expand the scope of state spending significantly. This will be inflationary unless balanced by the right sort of taxes: taxing the rich and taxing assets doesn’t fit the bill. Countries that do have higher levels of spending balanced by higher levels of tax do this by taxing middle income levels more than Britain does.

A second reason is the effect on the political economy. It creates a high dependency on keeping rich people and their assets in the country to maintain the tax base. It also creates high incentives for rich people to influence public policy. This is ultimately unsustainable, and the tax take is liable to decline, creating financial stresses in the future.

And a third reason is that there are peculiar vulnerabilities to the British economy. The country is more dependant than most on the drawing in the assets of rich people. That is one of the ways that the country is able to sustain a high level of current account deficit - imports outstripping exports. A financial crisis of one sort or another is likely to follow if the country is unable to do this.

If the political motivation for taxing the rich and assets is equity, or some other motivation, then none of these three reasons should stop you. They simply present problems that need to be solved - typically by raising taxes on other people, or cutting government spending - or simply accepting that a smaller economy might be a fairer one. But the current enthusiasm is presented as a way to help the state spend more.

Taxing richer people while keeping the pressure off middle-earners was the hallmark of the Conservative- Liberal Democrat coalition of 2010-15, alongside austerity policies cutting government spending; it is a pattern that the Conservatives sustained following the end of that government. The chief beneficiaries of austerity turned out to be low to middle-earners and pensioners. Reversing austerity, the rallying cry of the left, means coming back after these two groups.