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Friday 24 April 2009

Austerity and Utility – Take Two

Giving the least well off more money? How do we pay for that? And how can we be sure that they’ll spend it?

Lifting the folks at the bottom of the income pile out of tax, partially or wholly, means that others will have to pay more. There are a number of ways of accomplishing this: varying the VAT rate, increases in duty on tobacco and alcohol, or even the rate of direct taxation. That there would need to be increases in taxes elsewhere to enact this idea should not be ducked.

The benefit would come in the far greater likelihood that the extra money going to the least well off – or money not being taken away from them in tax – will be spent, driving economic activity, rather than being saved for the proverbial rainy day.

And that likelihood is far greater because the least well off will invariably have more things to spend money on, than the amount of money to do that spending. Economist speak calls this the propensity to spend. That propensity is rather lower among the well off: there are only seven opportunities in a week for dining out of an evening, and less if there are dinner parties to arrange or attend. There is a limit to the number of cars that can be kept and maintained within one household, or to the amount that can be expended on holidays, hobbies and other habits that exceed any concept of necessity.

The less well off, with their disposable income and therefore discretionary spending power at a low level, are far better candidates for a marginal increase in that income as a way of maintaining or even increasing economic activity. The spending may not garner universal acclaim amongst the chattering classes – it may go on the occasional takeaway or skinful of ale – but it is most likely to be spent.

But what of the deserving entrepreneur? This talisman of free marketeers, libertarians and others on the right, it is often argued, needs the extra marginal income as they drive increased economic activity through their efforts. However, this does not stand serious analysis. The straightforward question needs to be asked: just how many entrepreneurial spirits have been stifled waiting on a marginal personal tax break?

It’s all gone quiet.

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