Tuesday, November 2, 2010

Media and Economy

It seems the most effective opposition in the US these days are two comedians. The standard of debate on US cable media can be so hyperbolic and unrelated to impartial discourse that the best re-course seems to be satire.

But, a non-economists recently asked me is there not a similar whitewashing in the UK? He felt that the media more or less bought the whole government argument that spending cuts, though unpleasant were absolutely necessary. He felt why not increase taxes, for example, on the bankers which got us into this place?

Firstly, there is an argument spending cuts at this stage of the economic cycle will be damaging and could be left for later - Alternative to spending cuts.

But, what about tax rises as an alternative to spending cuts?

It is argued higher income tax reduces incentive to work and reduces attractiveness of UK as a place to do business. In practise it is more complicated. There are two factors at work. The substitution effect does make work less attractive. The income effect can actually make people work harder to maintain their income after tax rise.

However, it is worth bearing in mind 1p on the basic rate of income tax is said to raise around £2.5bn. With the size of the deficit, that is pretty big income tax rise.

Higher taxes could have been increased on the usual suspects - cigarettes, alcohol, petrol, e.t.c. But, VAT is already rising to 20%, and the UK has one of the highest rates of indirect taxes.

How Much Can You Tax Banks?

If there was a tax depending on who deserved to be taxed, the banking sector would deserve higher taxes. The Banking sector played a large role in contributing to the credit crunch, but they have largely escaped the pain of the spending cuts. It would be perhaps fairer if financial sector shared in more of the pain. I don't really know how much you can tax banks before, there is a real disincentive for banks to relocate to other countries and it may impact on UK's economic growth. The financial sector is still important to the UK, there is no point in cutting your nose to spite your face. But, I would still have tried to put more of the burden on those at the higher end of the income spectrum.

If I agreed with Government's budgetary cuts (which I don't) I would have placed a greater burden on tax rises, and protected any infrastructure invesment. Since many spending cuts affected low income earners, I would have used tax system to redistribute income and reduce rise in inequality.

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