Tuesday, 26 February 2013

Why the Welsh Conservative leader is wrong on taxes

Wales may just get the power to determine some of its own taxes if the recommendations of the Silk Commission are implemented. So the Leader of the Opposition in the Welsh Assembly has fired its first salvo. Unfortunately, he missed.

At the weekend, R.T. Davies suggested that the Welsh Government should, if it gained tax varying powers, reduce the higher rate of income tax (currently 40%) for people in Wales to stimulate the economy. He couldn't be more wrong on the issue. Evidence clearly suggests that higher rate tax payers are not re-investing any additional disposable income into investment. The most productive way to stimulate demand in an demand-driven service-oriented economy as the Welsh one is to lower the tax of those at the bottom of the income scale. That's simply because they spend a far higher proportion of their income on goods and services than those at the top. Income tax changes at the bottom of the income scale thus directly translate into economic stimulation. Reducing tax rates for higher earners usually only increases the savings rate, not something Wales or the UK need at the moment with a sluggishly performing demand.

If Davies's suggestion is bad economics, it is also bad politics. Wales is an Old Labour heartland. Welsh people have a very acute egalitarian instinct, and lowering the higher marginal tax rate is unlikely to play well with the Welsh electorate. So what Davies was thinking went he flew this kite, no one knows. With a bit more thinking he might just get his next salvo bang on target.

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