The election campaign has kicked off with another fight about jobs and the economy. Forgive my naivety, but the distortions and liberties taken with economics by both sides over taxes and jobs have already been breathtaking.
David Cameron, the Conservative leader, launched his campaign promising to stop “the job tax which would wreck our economy”, which is even more starkly illustrated in the latest Tory poster campaign. Pity that poor economic green shoot.
All of this hyperbole is nonsense. But showing no greater regard for economics, Gordon Brown, still prime minister until 6 May at least, warned: “Unemployment is falling but a party that does not believe in government action would put jobs at risk”. I have discussed this canard many times in this blog and will not go through it again today.
Instead, let’s just focus on the economics behind jobs and taxation briefly. The subject is deep, not fully settled and complex. But there are three things on which most economists would broadly agree. The fact Britain’s politicians ignore them does them no credit.
First, nearly all taxes are taxes on jobs to a large degree. People pay taxes; those with a greater ability to pay, pay more taxes; and people with a greater ability to pay tend to have jobs. So the link between jobs and tax is quite high.
Second, all of Britain’s really big taxes – income tax, national insurance and value added tax, which account for three-quarters of expected tax revenues in 2010-11- are certainly taxes on jobs. Think about it from the point of view of employers: if any of these taxes are raised, they have to pay their employees more to enable them to buy the same quantity of stuff. Employing willing staff is more expensive.
Or think about it from the employees’ point of view: if any of these taxes are raised, they will be able to buy fewer goods and services for every £100 their spent by their employers on hiring them. Whether the tax is levied on payrolls, incomes, or spending, working is a little less attractive. It is absurd for the Conservatives to suggest that a national insurance rise (which they will partially avoid) is a tax on jobs but today’s income tax rise (which they will keep) is not.
Third, the jobs tax is small, but variable. There is a huge literature on the effect of taxation on labour supply and demand, which is summarised neatly in some background papers for the forthcoming Mirrlees Review on taxation. It shows that for men, particularly rich men, there is hardly any jobs response to tax changes; but there is more response among women, particularly married women, who have more choices. Although rich people do not stop working if taxes rise, they do reduce the amount of income seen by the tax authorities. This final finding from many studies, casts quite a lot of doubt on Labour’s expectation of raising significant revenues from big tax hikes on the very rich.
