Redistribution of wealth is wrong

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There are some people who by enterprise, risk taking, investment and hard work generate wealth. There are others who are lazy, feckless and uneducated and therefore poor. It is socialist mantra to extort money from the former and give it to the latter. Every political party in Britain does this, in fact the current Conservative government does it more than the previous Labour government did. Every MP in our Parliament is a socialist.

In extorting money from those who have made it the state are incredibly inefficient. You would think that they would set tax rates to maximise government income. But they don’t. Tax rates are driven by envy and their usual aim is to punish success. There is an economic relationship between a tax rate and the income it produces. This is known as a Laffer Curve. As tax rates go up government income, initially, goes up. But then it peaks and with further rate increases it comes down. So reducing a top tax rate often increases government income.

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Let’s look at UK Corporation Tax which is paid on company profits. This is the worst possible tax because it removes from the economy the funds that successful firms need for investment and job creation. In 1980 it was at 52%. This has very sensibly been reduced till it is now 21%. And the effect of more than halving the tax rate has been to increase government income! Total Corporation tax paid has gone up whilst the rate has gone down. Meanwhile in the USA they have stuck with a 40% corporate profit tax rate and their government take has gone down, from over 6% of GDP to less than 2% of GDP.

UK income tax top rate under the dreadful Labour governments of Wilson and Callaghan was 83%, driven by pure envy and nothing more. They even had an extra tax on investment income (which the economy wants and needs) of up to 15%, making the top income tax rate 98%. For the wealth creators this was too much punishment so they stopped creating wealth. Margaret Thatcher came to power and reduced the top rate to 40%, after which it generated far more income for the government and our economy boomed. Very many people were now able to work their way up to being millionaires.

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When government gives money away to the poor they are also incredibly inefficient. Firstly in the UK poverty is defined as “household income below 60 percent of median income”. So it is actually quite rich, certainly far better off than a doctor or headmaster was when I was young. Yet still the government gives money in some form of benefit to about 30 million people, or half the total population. This is obviously utterly ridiculous and takes up about 30% of all government spending. There are 26 million households in the UK and 6 million of them receive housing benefit. This also is utterly ridiculous, any economist will tell you that putting more money into a market only increases prices. So as more housing benefit is paid housing costs go up and more benefit is needed. A vicious cycle of wasted taxpayer’s money.

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So lets look at some of the mechanics of redistribution. If we take income tax it would be fair if someone earning £30K paid twice as much as someone earning £15K, or if someone earning 100K paid twice as much as someone earning £50K. But they don’t. They pay far more. This is achieved by two methods. Firstly the first £10,000 of income (the personal allowance) is tax free, which disproportionately favours low earners. Secondly the actual rate goes up with income. So up to £31,865 it is just 20%, from there to £150K it is 40% and after that it is 45%. But there is something worse, personal allowances are progressively withdrawn from people earning over £100K, so their effective rate of tax becomes 60%. The effect of all this is stunning. People earning over £160K a year are just 1% of the population, yet they pay a third of all income tax. Poor people and middle earners would have to pay 50% more income tax if it wasn’t for this 1%.

But it isn’t just income tax that is used to punish the rich for their hard work. Stamp Duty is 0% on houses up to £125K, 1% on houses up to £250K, yet 7% on houses over £2 million. Inheritance tax is 0% for the first £325K after which it is 40%. And remember that a person has already paid tax once on this money, so Inheritance Tax is double taxation for the rich. Annual vehicle tax for small cars starts at £0 with a first year rate of £0 yet for big cars tops out at £500 with a first year rate of £1,090. And so it goes on. Being successful makes you a victim for government extortion.

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The really horrible thing about this envy based taxation is that wealth is not a zero sum game. So making a rich person poor does not somehow make any poor people better off. And everyone in Britain could retire as a multi millionaire if they had sufficient enterprise, education and hard work. In Britain today it is not that difficult to go from having nothing to being a millionaire. Every government should be trying to make this journey easier. But instead every government runs a tax system that makes it more difficult, that punishes success. Margaret Thatcher was the only post war Prime Minister who understood this. She wanted to make everyone richer and she knew that you don’t achieve this by extorting from those who are already rich, but by enabling everyone to make more money and to keep more of what they have made.

Now let’s take a look at Hong Kong. A HK$ is worth about 8 pence. The personal income tax allowance on which no tax is paid depends on family size. It starts at HK$ 1,620,000 pa and rises to nearly HK$6 million pa for a medium sized family. If you earn more than that income tax starts at 2%, rising to 17% for the very highest earners, the very minimum of redistribution. No wonder that, excluding the value of their homes, Hong Kong has 124,000 millionaires and that this number is increasing at 27% a year. The Hong Kong government does not work with socialist envy, it works with trying to make as many people as possible as rich as possible. We could do this in Great Britain but we don’t have the politicians who are capable.

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