A few weeks back I listened to a discussion on BBC Radio 4. One question concerned the wide difference that may exist between the salaries of senior management and the salaries of the lower paid workers. The audience, with the blessing of the panellists, abhorred such gaps. And I was mystified. Was the idea to raise all the workers’ salaries or to guillotine the managers’ earnings?
It is not clear to me why someone who is being paid the proper rate for the job should expect more money because his boss is affluent, or indeed less because his boss is skint. I would, in fact, prefer an affluent boss – there is a better chance that he or she is a good business person who will ensure that my job is safe.
No doubt there are senior managers who do not earn their keep, but on the whole they do. Someone who can build up a business, anticipate the markets, design saleable products and services, and organise distribution does tend to contribute more to the wealth of nations than the average routine worker. We have forgotten how the Industrial Revolution, and the foundations of Britain’s prosperity, was dependent on the inventors and the entrepreneurs who were rightly well rewarded when they were successful, and rightly fell into a ditch when they weren’t.
This urge for equality provides us with an example of the law of unintended consequences. Attempts to reduce the wealth gap in the pursuit of alleged justice result only in mediocrity. This damages the interests of everyone in society – and particularly those at the lower end. Justice and equality are not synonymous.
We do, of course, have a mechanism which reduces high incomes; it is called progressive taxation. Never in our economic history has the proportion of our tax take weighed so heavily on the higher incomes, or so lightly on the lower incomes. Yet there are many who claim that the burden should be even higher. This economic illiteracy is dangerous. Above certain levels, taxation rates actually lead to less revenue. The curve turns downwards as the high taxpayer is motivated to re-arrange his affairs, and there are plenty of legal ways in which he can do so. A state which is more interested in reducing incomes than in increasing tax revenue has started down the path of confiscation. And the law of unintended consequences bites again.
But what about those bogeymen – those terrible bankers? Yes, there have been crooks, as the Vatican bank amply demonstrated, and there have been those who endangered the state through greedy irresponsibility. We need the right regulation, but we must avoid killing the golden goose in the process. The industry employs upwards of two million people, is responsible for 10 per cent of our economic activity and pays £65 billion a year in tax. The EU is constantly looking for ways to cut it down to size, while we who benefit are resentful and ashamed of its success.
Beside the bankers on the naughty stool are those companies who do business here but pay their taxes elsewhere. Yards of newsprint have condemned their perfidy. It is rarely mentioned that several countries, including this one – to say nothing of Ireland – actually compete to provide tax domicile by reducing their corporation rates. Who is the hypocrite here?
There are other examples of unintended consequences. We have a rating system based on domestic property value (irrelevant) and not on household income (relevant). Stamp duty at high rates on domestic property discourages house moves, and inhibits the economic activity which this turnover stimulates. It prevents downsizing, and so releasing accommodation for others. And fewer sales lead to lower stamp duty revenue. Inheritance tax at high rates attacks our natural desire to benefit our children, and hits big families the hardest. Meanwhile, the worldly wise can turn it largely into a voluntary tax.
But what about the poor? Our primary duty here must be to provide what is required for food, clothing and shelter. This means that we need to raise the minimum wage to the Living Wage. It might take three years to achieve this to avoid unintended negative effects. Next, we must work hard to reduce relationship breakdown, which is a major source of poverty and of damage to children. Beyond such steps, we must offer opportunity.
Opportunity starts with education. A child who leaves school without fluent writing, reading and basic arithmetic has little chance of future success. And I note that Mr Gove, in his time, took the heterodox view that teachers should teach. No wonder he had to go. And we have much to do to reduce the cycle of deprivation through which successive generations reproduce inadequacies in the upbringing of children.
Such social programmes are expensive in the short term, and the benefits come in the long term. But they will not ultimately be a burden in a society which rewards success, because the tax revenue will be a by-product of greater economic activity and lower unemployment, rather than a fruitless raising of tax rates.
But I am not optimistic. We are leading up to an election in 2015. That means a race to the bottom in which votes depend on how enthusiastic we are to fleece the provident in order to satisfy the improvident. We have to choose between a society which champions success so that, in the long run, its weakest members benefit, and a society on a direct course towards mediocrity for which the weakest ultimately pay the price. An unintended consequence, indeed!