It’s amazing how bad politics is at economics, isn’t it?
We’ve had a Nobel Laureate in economics, one who gained his NL for his study of taxation systems. Sir James Mirrlees went on to survey how the British tax system should be constructed - from the economic point of view - in his eponymous review. In the taxation of earnings from capital his suggestion was - to be economically useful - the risk free return to capital should not be taxed. He suggested that that risk free return be declared to be the coupon/yield upon Gilts. We’d probably mutter that it should better be the cost of equity - so perhaps 8%, not the current 5%. But the point still stands - the risk free return should be tax free.
Then we’ve politics:
He singled out two ideas for new wealth taxes to The Telegraph on Wednesday. The first is a 2 per cent tax on assets of more than £10 million, which is an idea being pushed by the Patriotic Millionaires UK campaign group, and the second is increasing capital gains tax in line with income tax.
“It is the broadest shoulders argument. ‘Distributed to each according to his need.’ That’s not Marx, it’s the Bible,” Mr McDonald said.
“I’ve made the case for the last six months for wealth taxes. I’ll continue to do so in the next six months because it’s right.”
The current taxation system on income from gilts - to stick with that version of risk free - is 45 pence in the pound income tax upon the interest. We are, after all here, talking about the rich who will be paying that rate. Inflation (CPI) is currently 3.4%. So, the real return on a gilts holding is £100 of income, £45 income tax, £70 loss of the capital sum to inflation (3.5%, slight rounding, of the £2000 necessary to hold to gain a £100 income at the current 5%). The proposal for that wealth tax is to add another £40 to the taxation of that original £2,000.
Or, to move the tax rate alone from 45% to 85% or, with inflation, to 155%. That’ll do capital formation - the very thing which makes the nation richer in the future - a world of good, no?
Aren’t we just so lucky that the people trying to run the economy take such good notice of economics?
Tim Worstall