taxing the rich is a good in itself for the way it closes the gap between rich and poor

TO BE NOTED: From the BBC:

"Why tax the rich?

Robert Peston | 11:16 UK time, Friday, 24 April 2009

It is no exaggeration to say that this week's budget will define our politics, our prosperity and the nature of our society for at least five years and probably much longer than that.

As Stephanie Flanders, Nick Robinson, myself and others have elucidated, everything stems from the massive increase in public sector debt over the next few years to a level that will take more than a generation to pay down to levels that we consider normal.

The political debate will be over whether to attempt to pay the debt down faster, by cutting public spending more than the chancellor set in train and/or by increasing taxes more than he announced. That debate will frame the next general election.

How fast we reduce the debt and how we pay it down will also have an impact on the long-term growth of the economy and on the prosperity of the nation.

There is a trade-off between the scale of early pain - in the form of how fast and how much the size of the state is shrunk - versus the rate at which the economy will subsequently grow.

Economists are, of course, divided about whether our net long-term prosperity is maximised or minimised by being brutal early with public spending reductions.

But even if it were incontrovertibly true that we'd all be richer in the long term from fast and savage cuts in public services, those cuts would be felt most acutely by the poorest - which many would see as an argument for a more gentle approach.

Whether David Cameron likes it or not, the long shadow of the Thatcherite 1980s still conditions the consciousness of voters and politicians.

Which brings me to what I really want to talk about, which is the attempt to increase the tax burden on high earners.

According to the Treasury's figures, £7bn will be raised by 2012/13 from three raids on the rich: the new 50% tax rate for those earning £150,000 and above; the tapered reduction of tax relief on pension contributions to 20%, again for those whose incomes are £150,000 or more and the abolition of tax-free allowances for those earning £100,000-plus.

In respect of the hole in the public finances, the better-off are being asked to make a disproportionate contribution. But £7bn won't go anywhere near to closing a gap between the government's income and expenditure, which is currently running at £175bn.

What's going on can perhaps be best seen in a bit of analysis by the Institute of Fiscal Studies.

It points out that if high earners made no attempt to avoid paying the new 50% rate, this new top rate would yield £7bn a year on its own, as opposed to the £7bn actually generated (in the Treasury's view) by all three tax changes.

But the Treasury believes that the yield from the 50% rate will be just £2.4bn because high earners will adjust their behaviour in ways that mean they avoid incurring all the increased liability.

Here's the thing. The IFS says that the Treasury's own figures imply that the new tax rate will in fact only generate about £1bn of extra tax, once the depressing effect on revenues from VAT, stamp duty and other indirect taxes is included (because the wealthy will spend less than they would otherwise do).

What's more, the IFS says that the Treasury is actually being too optimistic, on the basis of the best economic model of the impact on revenues of tax-rate increases. This model predicts that the Treasury will actually lose money on the new 50% rate, once the reduced harvest from indirect taxes is taken into account.

Now we're in the realms of behavioural uncertainty here. But there is a clear implication that if the Treasury simply wanted to raise a big sum of money fast and cleanly, it would have gone for other kinds of tax rises.

Which in turn implies that the 50% rate is less of an economic necessity and more a return to Labour's 1980s ideological view of fairness in taxation, that taxing the rich is a good in itself for the way it closes the gap between rich and poor.

The prime minister insists that New Labour - or Labour reconstructed as a party of financial aspiration which celebrates wealth creation - isn't dead. But many will say that the budget tells a different story."