Taxes and the Rich

There are few things more emotive than taxation and "the rich", and I have little doubt that as undergraduate students you have a few opinions on these issues.

It turns out Nick Clegg has made a public pronouncement (via the Guardian) that the rich should pay more tax - at least for a while...

The purpose of 217 is to encourage you to think about issues like this as an economist - to put your learning into practice.  So the think we should try our best to do is put politics out of the picture for as long as we possibly can, and try to think about things objectively - if that's possible!  Bernard Jenkins, a Tory MP, is very quickly political in the linked BBC article, trotting out the usual line that Clegg is indulging in the "politics of envy" (John Redwood does at least try and defend the Tory approach to taxation and the rich - something we are often quick to ridicule). Let's try and leave that behind.

One fairly commonly known theory, and one often cited when discussing matters of taxation is that of Ricardian equivalence, proposed by the famous economist himself.  It says that people are aware of the government's budget constraint, and hence realise that any cut in taxes now (or increase in spending) will have to be paid for, and hence they expect higher future taxes and so do not increase personal spending now but instead save up for when the tax bill will come in the future.

It's an intellectually appealing theory - we like to think people are rational and make sensible decisions like this. However, it does rely on a number of assumptions, as any economic theory does. For example it requires for its full effect that tax imposition is even across society, hence that all will feel the pain of increased future taxes to pay for current spending. In our progressive tax system, this is unlikely. It also does not reckon with our impatience - we want jam today not jam tomorrow and hence we'll spend today and face the consequences tomorrow.

We'll think a lot about policy in econ217 over the coming year, and one thing it's important to recognise is that nothing can be proven one way or the other using the tools of economics - neither data nor clever reasoning constitute proof in matters such as this, particularly when we are trying to predict the future. But this also does not render what we will discuss as meaningless - it will still pay for political parties to put in place economically sensible policies rather than trying to use economists for intellectual cover for ideologically driven policies (a common trait of all political parties).  It should be an interesting year!