Despite her high-flying career as “an economist at the Bank of England for many years”, Rachel Reeves keeps tripping over mistakes that should be obvious to any first-year student. Her last Budget is a case in point. By hiking employer’s national insurance by £25billion, she effectively slapped a tax on jobs.
Predictably, employment plunged. Since then an estimated 175,000 jobs have vanished, with another 100,000 under threat as firms freeze hiring or go bust because they can’t afford the extra tax. Growth has flatlined as a result.
She also went gone in hard on wealthy foreign non-doms, saying she’ll impose inheritance tax at 40% on their worldwide assets. Yet the Treasury has been warned this could cost us £6.5billion and 23,000 jobs over the next six years. Rather than pay the tax, one in four non-doms may quit the UK and others won’t come.
These aren’t minor slips. They stem from the oldest misunderstanding in economics: the belief that if you tax more, you’ll collect more.
In reality, at some point higher taxes shrink the base they’re levied on. That’s the insight economist Arther Laffer sketched out on a lunchtime napkin half a century ago. It became known as the Laffer curve. Reeves still fails to grasp how it works.
Arthur Laffer’s idea is almost embarrassingly simple. Pay someone, say, £30 an hour and let them keep every pennyl, they’ll leap at the job but the taxman gets nothing.
Charge 100% tax and they’ll stay in bed. Again, the taxman gets nothing. Somewhere in between lies a sweet spot where effort is still rewarded but tax receipts are maximised.
It’s basic common sense. Unless you’re Rachel Reeves.
Laffer insists his work isn’t party-political. It’s a law of incentives, as certain as gravity. Yet the left has always resisted it. Reeves and her allies prefer to see tax as a weapon of redistribution, even class warfare.
That may feel righteous, but it ignores how people behave in the real world. Punitive rates drive activity underground, offshore or out of existence altogether. That means fewer jobs, weaker growth and ultimately less money for public services.
Left-wing campaigners, including Torsten Bell, who is writing Reeves’s Budget, have been calling a big hike to capital gains tax (CGT).
Yet the Office for Budget Responsibility has warned this could blow a £23billion hole in the public finances as receipts fall.
Instead of selling assets and facing punitive charges, investors will hold on in the hope a later government reverses the hike. The Treasury ends up with less. The ideologues don’t care.
Here’s another example.
Rather than hiking property taxes in November, Reeves should do the opposite and scrap stamp duty, a levy that gums up the housing market. That would spark activity across everything from removals to renovations.
Business groups warning that yet another round of tax rises will accelerate the drift of firms and talent to the US, killing the economy and cutting tax revenues.
Reeves must learn the lesson of the Laffer curve before she destroys even more jobs, drives out wealth and leaves Britain even poorer. Has anybody got a napkin?