Bank of England Governor Sir Mervyn King has come under fire for the gloomy assessment of the economic outlook that he delivered this week, but he's got nothing on the media, who are lining up to bombard us with "things can only get apocalyptic" features. Case in point: today's Sunday Times has a two-page Focus special (paywall-protected), with a zillion-point headline reading "By George, we're in trouble!".
Most of the content is not worth bothering with, on a Sunday when most of the media are giving wall-to-wall coverage to two giant pandas arriving in Edinburgh. (Non-UK readers: I kid you not). However, I was struck by a comment from the right-wing Tory grandee, David Davis, who proposes a very specific cure to the nation's ills: abolition of the 50% top rate of income tax.
Passing swiftly over the question of whether there's ever a time when David Davis would not favour reducing taxes on the wealthy, let's take a look at his logic. He asserts that it's "plain as a pikestaff" that the 50% rate is costing the Treasury money, because it encourages the better-off to take more tax avoidance measures. As evidence, he cites the fact that income tax revenues increased back in the 1980s, when Margaret Thatcher's government cut the top tax rate from 83% to 40%.
The view that lower tax rates will tend to produce higher revenues is often illustrated using the so-called Laffer curve, named after a Reagan-era US economist who supposedly first drew it on a napkin in a Washington restaurant. The graph plots the total tax take on the x-axis (that's the horizontal one, for the non-mathematical) and the tax rate on the y-axis. This article on wikipedia is accurate and comprehensive.
Without doing any research, we can safely assert the positions of two points on this curve. At a tax rate of zero, or at one of 100%, no tax will be collected, in the latter case because nobody would work if they got to keep none of the proceeds. Between those points, though, it's all to play for. Laffer, and presumably also David Davis, want to believe that the total tax rate starts to turn lower as soon as tax rates reach a moderate level -- Davis, evidently, is thinking the point of diminishing returns is a rate of less than 50%. However, as the wikipedia article points out, some of the academic evidence suggests the rate that maximises revenues might be more like 65%. If this is the case, then it's no surprise to find that the Iron Lady's cut from 83% to 40% boosted the government's take. However, it's quite wrong to use that example to assert that a cut from 50% to 40% would have the same effect today.
Leaving all that aside, you have to wonder how David Davis would seek to square a top-rate tax cut with the government's "all in this together" mantra, though presumably a man who employs similes about pikestaffs may not be a natural supporter of the "Big Society" anyway. If Davis has any evidence that a lower tax rate would induce tax exiles like Lewis Hamilton or Sir Philip Green to start contributing more to the British exchequer, he should feel free to produce it, but otherwise this all just sounds like a standard Tory whinge, and at a most inappropriate time.
Coming back briefly to the Sunday Times, one corner of today's two-page armageddon story was given over to a box containing three possible scenarios for the coming months, written by the economics editor (and blogger), David Smith. The three scenarios are each awarded a probability score, on an "X out of 10" basis. Why don't you count along on your fingers as I go through them? The "grim" scenario has a probability of 7 out of 10. The "Goldilocks" scenario: 5 out of 10. And Armageddon: 4 out of 10!
I don't know about you, but I ran out of fingers about half-way through the Goldilocks scenario. David Smith is a good and logical writer and it's very likely that those scores were assigned by the sub editors. Still, as a sign of chronic innumeracy in the business press, that's hard to beat.
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