National Insurance: taking it out or putting it in?

The election campaign should be bringing on another Great Depression in the minds of all taxpayers. This morning Gordon Brown continued his daily rant at the Tories for promising to reverse his increase in the National Insurance tax because “this is no time to be taking money out of the economy.”

Surely anybody with a modicum of common sense would realise that no money would be taken “out of the economy”. Rather (to use Brown’s ridiculous terminology) it would be taken back from the government’s “economy” and put back into the private sector “economy” from whence it came. 

In fact it is far worse than this. Brown has it precisely backwards; all taxes “take money out of the economy” because they weaken the division of labour and therefore reduce output and living standards. My estimate is that Brown’s £6 billion hike in National Insurance knocks £4 billion of productivity into a black hole. Just as tariffs (i.e. taxes) on international trade reduce international trade (that’s the idea!) so do internal taxes reduce internal trade and therefore reduce living standards. This is true of any kind of taxes, since all are effectively based on trade and exchange.

Add in the deadweight costs of taxation and it is a slam dunk: http://www.timesonline.co.uk/tol/comment/columnists/guest_contributors/a...

During the two PM debates I been urging Cameron to challenge Brown on this. It is, as you say, an elementary point. My only reason for him choosing not to do so – other than ignorance, of course – is that it would diminish the significance of the Tory proposals and so give the impression that the change would be neutral. Either that or someone has told him the argument is too complex to condense to a sound bite.

And if I may add a section of my own letter to the Telegraph earlier this week:“The economists state that the tiny proposed cuts in public spending will (not “may”) lead to job losses and falls in spending. In an open economy, if the state finances spending by borrowing, it can start a process – even in recession – that adversely affects exporters, investors and consumers. Government borrowing can soak up the money created by quantitative easing. If, however, efficiency savings finance lower tax rises, it is difficult to see any logic in the economists’ arguments.”

Many thanks for these responses.Steve: I think the deadweight costs are part and parcel of my broader division-of-labour point. But as you say it’s a slam dunk however you look at it!

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