Professor Patrick Minford says Tony Blair understand the rich are crucial for growth (Image: Getty)
This Labour government has proclaimed repeatedly since arriving in office that growth is its overriding aim.
Yet it proceeded at once to discuss endlessly, and then finally implement, a budget which levied extra tax demands on ‘the rich’, including small business owners and family farms, not to speak of the ‘non-doms’, foreign owners of worldwide capital who made their home here, and not forgetting those sending their children to private schools. The result has been that business leaders have reacted with savage dismay to this Budget from Rachel Reeves.
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Growth prospects based on business plans to innovate and invest look hopelessly dismal.
Yet the irony is that the measures most expensive to the rich – the changes in Inheritance Tax, Capital Gains Tax and the non-dom rules, are likely to raise little if any revenue. That is according to the Treasury’s own watchdog, the OBR, which considers the revenue yield from them all to be either highly or very highly uncertain because of behavioural reactions.
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This conforms to what much research has found: that raising marginal tax rates on high income earners reduces revenue owing to its effect in reducing activity – the effects noted in the Laffer Curve named after Professor Art Laffer.
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Don't miss... The budget should be all about growth not taxing the rich, says economist
But the effects do not stop there. They also go on to reduce growth, as the incentives for these same people to innovate and invest to improve future earnings are much reduced. Why take risks on these moves when the returns are lowered in this way?
To these tax incentives must be added labour market intervention, particularly in the award of union powers, that enable well-organised groups of workers to appropriate business profits.
The research on this is more recent. But it finds that these incentives have played out over more than a century of British history as well as most obviously in recent decades as these marginal tax rates and labour regulations were pared back by the Thatcher governments and then allowed to creep back up again.
What this research shows is not only that growth depends on these incentives but also that because the rich are more responsive to them, being less worried about the risks, growth tends to be carried out by the rich and this increases inequality. This creates a trade-off between growth and inequality, so that if you want growth you need to accept more inequality.
We can see this all playing out before our eyes in the contrasting performance of the US and UK economies. Growth is surging in the US as tech entrepreneurs face low tax rates and a free labour market; and inequality is rising too.
Here the incentives are poor after decades of rising tax and regulation creep. Growth is flat-lining and policy keeps inequality low.
Our problem is that this redistributive bias in our policy, most clearly championed by this Labour government, is not sustainable because of the absence of growth. There is a conflict between what is severally popular with groups of voters allied by a common interest, and what is viable for the general voter.
Even this typical ‘average’ voter is tempted to vote for redistribution as he or she seems to benefit directly , but hopes someone else will prevent the downside of lower growth affecting all to some degree. Instead it is easier to think that ‘the rich’ will pay up, without any consequences for the economy that affects us all.
In economics this is represented as the need for people to contribute to ‘public goods’ that benefit all but which all would like others to pay for. Well, growth is the most basic public good, as without it we will not be able to pay for our basic public services.
And to have growth we need the rich and the inequality they represent. This in fact became the mantra of New Labour, as set out by Tony Blair’s first government.
What Blair understood was that keeping markets free and top tax rates down created growth which in turn created revenue, coming from the rich themselves in our progressive income tax system – where the top one per cent pay 30 per cent of the tax collected. This original appreciation of the underpinnings of good economic policy has unfortunately been lost in current Labour policies.
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Recovering it is now essential if Labour wants to succeed in its economic aims.
Yet Labour has dug itself in so deep with its attack on the rich in this budget and the associated employment Bill that nothing short of a thorough-going repeal of the Budget changes and a defanging of that Bill in its Parliamentary stages, will do the trick.
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With voters now thoroughly disenchanted with this Government, Labour needs to make major policy changes to have any hope of staying in power after the next election.
As for the Tories, they went slowly but steadily down the same path that Labour enthusiastically doubled down on once they got power. Reform meanwhile have been rather coy about their policy agenda.
To challenge Labour on the central ground of the economy, both the Tories and Reform need to make quite clear how they are going to recreate growth. They need to start by showing a new love for the rich.