Saints and demons of taxes

After her rather inauspicious 49-day tenure as PM, Liz Truss, the Slayer of Taxes, pulled the poisoned arrows out of her body and crawled into political wilderness to recover.

Her wounds have now healed sufficiently for her to come out firing. Miss Truss says the left-wing economic establishment never gave her a realistic chance to implement her tax-cutting policies. Nevertheless she still stands by them.

Miss Truss positively sounds like Martin Luther who declared: “Here I stand; I can do no other.” Such obduracy has led to her being branded as a saint by some of her colleagues and a demon by others.

This serves a useful reminder that the difference between the two is like beauty – it’s in the eyes of the beholder. An adherent of one religion may well regard the saints of another as demons, and vice versa. In that sense, tax policy is like any other creed.

Those who worship at the altar of wealth generation swear by lower taxes. Their general point is irrefutable: the more of their income people are allowed to keep, the harder they’ll work to earn it and the more they’ll produce.

What’s true for individuals is also true for corporations. Taxes cut into their profits and, the deeper the cut, the more likely they will be to take their business elsewhere. Hence they’ll attribute saintly qualities to any economist or politician who preaches low taxes.

That creed clashes with its opposite: the worship not of income generation but of income redistribution. That aim can be achieved either illegally, by highway robbery, or legally, through high taxes (sometimes the two methods are indistinguishable).

Politicians preaching and levying high taxes are the saints of this creed. It stands to reason: the more money the state extracts from income generators, the more income it’ll have to redistribute.

Neither faith exists in its simon-pure, absolute form. Income generators tend not to demonise all taxation without exception, only the extortionate kind. Conversely, even fervent income redistributors begrudgingly accept that, if no income is produced, none will be redistributed. Like in so many areas of thought, it’s a matter of relative weight, not absolute virtue.

As a fly-by-night PM, Liz Truss came up with a policy that combined tax-cutting with no reduction in public spending, a combination known not to work since Reagan’s first term (I’m using an American reference because this kind of thing had never been tried in Britain).

The markets rebelled, Miss Truss was demonised and hastily hounded out of office. One can understand her detractors: even a good policy becomes awful when badly thought through and clumsily executed.

However, committed income redistributors led by today’s PM and Chancellor now use that unfortunate stint as a way of demonising tax-cutting as such. Mr Sunak called Liz Truss “delusional”, although it’s not immediately obvious what her delusions are.

For example, she calls Sunak’s corporate tax increase from 19 to 25 per cent “counterproductive” because it has an adverse effect on both people’s wages and foreign investment in the UK.

If that’s a delusion, then Mr Sunak has to believe a higher corporate tax actually encourages foreign companies to invest and enables all companies to pay higher wages. I’m not a professional economist (neither is Mr Sunak, come to think of it), but that notion strikes me as counterintuitive.

Let’s say you are the chairman of a large Japanese company planning to establish a European base. Having considered all options and weighed numerous factors, you’ve narrowed the choice down to Britain or France.

Surely a 19 per cent rate of corporate tax would be more attractive than France’s 25 per cent? I’m sure all sorts of variables come into play, and the lower tax rate is only one of them. Still, implying it hardly matters strikes me as ignoring both common sense and human nature.

The same goes for wages. If the company’s income equals X, then X minus 19 per cent leaves more cash to play with than X minus 25 per cent. So how is it delusional to suggest that the higher rate just may push salaries down? Beats me.

Some Tory MPs have attacked Miss Truss’s re-emergence as politically divisive and therefore destructive to Tory unity. What Tory unity? The kind where most MPs calling themselves Conservative close ranks behind frankly socialist policies?

If Miss Truss does destroy it, then good riddance I say. As for the laments that she jeopardises the party’s chances at the next general election, those MPs don’t need to worry. The party has already lost the next election, and I can’t find it in my heart to say undeservedly so.

That’s proved by some of the criticism of Truss’s policies. This isn’t to say they were above criticism, far from it. But the criticism has to be sound, which is more than I can say for the typical accusation enunciated by a senior MP:

“Up and down the country council candidates and MPs are still meeting folks dealing with the real-world consequences of Truss’s time in power, like increases in mortgage rates.”

That’s just economic ignorance. Mortgage rates went up because the Bank raised the prime rate of interest. That had to be done because of the runaway inflation rate, imposing a much higher real tax than the one officially announced by the government.

If that MP and others in agreement with him believe that lower taxes are inflationary, they should read some textbooks on economics, the basic ones.

Inflation is essentially too much money chasing too few goods. Lower taxes don’t increase the money supply, they simply keep more revenue in the private, which is to say productive, sector. Hence they are more likely to lower inflation than to increase it. Conversely, it’s high public spending that’s known to be the main reason for inflation.

Business Secretary Shapps made the only intelligent comment I’ve read: “I think she’s right about the need for a long term, lower tax. But I think it rubs up against the reality of two or three years of Covid and £400 billion cost of that, followed by a war and the enormous cost and pressures of energy and inflation.”

It’s true that conventional economic wisdom may have to be put on hold when force majeure strikes. Now, Covid was indeed force majeure. However, the government’s response to it wasn’t. Not all countries afflicted by Covid reacted by totally shutting down their economy for almost two years.

Neither were “pressures of energy and inflation” an uncontrollable hurricane whose force is beyond human control. The former was a direct result of the government’s inability to develop energy independence – largely because of the ideological commitment to eco-zealotry.

And the latter came from the decades of HMG piling up one deficit budget on top of another – again because of an ideological commitment, this time to the welfare state and such money-devouring Leviathans as the NHS.

None of this is an endorsement of Liz Truss – she went about her tenure without the decisiveness, competence and intellectual rigour the job requires. A saint she isn’t — yet she isn’t a demon either. She says many correct things and the louder she says them, the better.

Someone should keep reminding our Tories that they aren’t Labour. Left to their own devices and vices, they tend to forget.