Parsing that Compass report


Compass had a report out last week which you can read here. All the usual arguments we've come to expect: don't cut "public services" and do ramp up taxation upon the rich and everything will be just hunky dory. However, as usual again, the arguments don't in fact stack up: and no, this is nothing to do with whether what they desire to do is a good or a bad idea (that I think it a bad one is not relevant here). It's simply and purely that they're arguing two entirely contradictory things in the same paper.

Their argument against cuts is that it's cheaper to have someone being employed by the Government than it is to have them on benefits. No, don't even worry about their arithmetic here, just take that point as it is. So if we cut "public services" by firing half a million bureaucrats that means that we'll make the public finances worse, not better. Implicit in this argument of course is that everyone so fired will go on benefits. That not one single one of those currently employed by the State will be able to get a job outside the molly coddling of the public sector.

No, don't even worry about what this says of their views on the competence of those currently in public employment (that they are, quite literally, unemployable elsewhere). Let us move on to their second argument, about raising taxes on the top 10%, the top decile, of households.

These tax rises are really very impressive indeed: marginal tax rates would move to 75% and in small bands to possibly over 100%. Average tax rates (the percentage of total income paid in taxes) would rise by 60% or so from 34% to 55%. We would expect some sort of change in behaviour from such tax rises but as Chris Dillow points out, exactly what they will be is difficult to predict. Will people offer more market labour in order to maintain their post tax income? Or will they trade income for leisure in the face of the high marginal tax rates? Again, let us not be too empirical here (facts are such nasty things) and let us look just at the logic being used. After a lot of badgering, Richard Murphy (for yes, of course he is the author of this report) tells us what assumptions he has made about which effect will predominate.

For reasons we have given - and which I have explained here - we think there will be behavioural changes - which may result in more, not less effort

I think there may be a greater demand for work - for example from the second partner in a high earning household that will - in accordance with all observed social behaviour - including the wish to ‘keep up with the Jones’ or to simply pay the mortgage - which is widely ignored in the blackboard economics you favour developed, rather oddly, by economists who have never worked in a market in their lives

That pressure to earn more to cover fixed obligations will, I (we) think counterbalance any tendency to reduce work.

We'll even leave aside the well known point from "blackboard economics" that married womens' (this is of course what "second partner" means in general and in practice) decisions to enter the paid labour market are more sensitive to marginal tax rates than mens'....for of course, empiricism is so passe these days, is it not? Concentrate again just on the logic.

We must not cut spending because there are no jobs to go to, meaning that the public finances will be worse off. But we can raise taxes because any of those ladies who currently lunch can simply waltz into a job and the public finances will benefit.

I can see that you can believe either one of these but to assert both in the same paper is really rather Red Queen behaviour. So, this is Alice in Wonderland economics. Unless, of course, you really do want to assert that the current public sector workforce is unemployable except on the public shilling and yet that the wives of the upper middle classes are a labour resource of such value that all will get jobs at the drop of a Hermes scarf.

An assertion which I suppose you can indeed maintain if you were some extreme form of Social Darwinist but it's a very odd argument indeed coming from an organisation like Compass...even if not all that odd from Richard Murphy.