The politicians are at it again, in the UK. Raising taxes to pay for their own past mistakes. Unlike the US democrats, the British government can’t blame the other party at all for what’s happened, since they’ve been in power since 1997. I’m no economist by training, and I’m not living in the UK at the moment, so perhaps I’m ill-informed. Perhaps.

Today, Alistair Darling has proved to be nobody’s darling: He hiked the top rates of tax for those earning over £100,000 which according to one story combined with other plans of his are estimated to bring in an extra £6bn by 2012 rising to £17bn by 2014. He’s also trimmed benefits, taken away tax breaks, and much more…

Given that his assumptions are optimistic, to say the least, raising taxes on any segment of the population at this time is likely to vary from mildly regressive on most people to seriously foolish. I tend to the latter end of the spectrum. Why? Because those who are the entrepreneurs in the UK are the ones most likely to provide work for those who earn much less, and they need the capital to provide investment capital for future businesses.

Startups Need Capital

Startup capital comes from someone’s pocket, after all. If tax rates rise, entrepreneurs will conclude that the tax burden places an increased need for higher returns. This means that they will either find markets with better returns than ours, move their domicile off-shore, or simply exit the British markets. Or they will charge more for their products and services. Is it any wonder that British consumers typically pay over the odds for products and services? Hint: it could be linked to the amount of taxes they are paying, directly (VAT, etc.) and indirectly (corporate taxes).

Back to you and me

In the end, the only people who suffer are the ones who purchase the services and products, ie. you and me. Why? Because we’re the least informed on how to create tax efficient vehicles, how to get tax credits for investments, how to offset tax increases, and where to shelter money from grasping governments.

It’s all in the numbers

“His calculations, however, depend upon a forecast growth rate of 1.25% next year, rising to a figure of 3.5% in 2011.” (source) Does anybody seriously believe we’ll have growth in 2011 of 3.5%? Really, are you kidding? Mortgages are underwater, unemployment is jumping, people still can’t get credit, and others have their credit lines closed by banks too nervous to hold their customers hands any more. With customers needing more cash, where is all this consumer spending going to come from?

But what surprises me?

The tax rates are going to penalize those people whose talents are needed in investing, finance, law, politics, business, government, science, social services, health care, and so on, the ones we need to build, sustain and nurture our country. Doesn’t anyone remember the last grandiose experiment in raising taxes in the 1970’s when top tax rates virtually killed British industry, stifled entrepreneurs, and led (indirectly) to thousands of layoffs in all industries? Oh, well.

It’s in the figures

But I took a look at the graphs, and I don’t get it. It tells me that the government has borrowed £175bn, yet it makes no account of where this borrowing went, how it was divided up, or why it accounts for fully 26% of government incomes. Of course, it beggars belief that borrowed money could possibly count as ‘income’ in the first place. But worse, the interest on that money now eats up £28bn of expenditure. This makes it the seventh largest expenditure in the budget. And I would guess this amount will continue to grow even more. ( A crude calculation shows that this is at an APR of 16% … wow! Perhaps the government should find more economical ways to borrow money!) I do know that if I ran my business with interest amounts so large, and rates like these, I’d be moving as fast as possible to cut my debts, not borrow more.

Whither inflation?

Unfortunately, I’m not convinced: I think this set of figures bodes badly for inflation. The government will be tempted to inflate its way out of such large debts by allowing inflation to be higher when recovery comes. And it’s likely to include a period where we revisit oil prices in the $80’s and $90’s as soon as recovery begins. Inflation is around the corner, and gold prices are a hint of what is to come. But then again, I’m not an economist.

So buy your salt now if you believe prices are going to rise, or buy it later when it’s cheaper. Either way, these days you’re going to need a lot of it when you read the governments’ assessments of what is going on, and what is going to happen.