Most of the time, reading anything from the Maily Telegraph is routine, although picking holes in the articles is not without interest. And then I came across a new blog they are hosting, written by former Thatcher stalwart Norman Tebbit. Norm and I are unlikely to be on the same side of many discussions, but we appear to share common ground on the subject of taxation and allowances, as his post from last Wednesday shows.
Tebbit sees no reason why the threshold for paying tax should not be raised to ten or even twelve thousand pounds. I agree with him. We may be coming at this from slightly different directions: he is clearly concerned with the disincentive for those coming off benefits and into work, while my first thought is the encouragement of economic activity. I will explain.
Suppose you are going to give someone a tax break with the goal of encouraging more economic activity, and the choice is between targeting the well off, or the less well off. It’s often said that the well off should be the beneficiaries of tax cuts, as this encourages entrepreneurial activity. I rank this opinion among the finest examples of industrial strength drivel: the typical entrepreneur may get money lent to start their business, and is most unlikely to be a top rate taxpayer at the time - witness the career of arch entrepreneur Richard Branson. The Virgin group didn’t start its journey from the well off being given a tax break.
No, the best chance of getting more economic activity from a tax break is to give it to the less well off: here, there is always a queue of demands for any marginal increase in income, so the propensity to spend is high. The money might be expended on a good night out, but what the heck – it will get spent. The same cannot be said with any certainty of the well off, where the propensity to save is high: extra money is more likely to be put into savings, and thereby taken out of circulation, adding nothing to overall economic activity.
Whether this analysis has occurred to Norman Tebbit I do not know. But I am glad to be, albeit temporarily, in such illustrious company.