Nicholas Kaldor on taxes and the illusion of incentives

Nicholas Kaldor was a post-Keynesian economist at Cambridge University and, during his final years in the 1980s, a devastating critic of the Thatcher government’s adherence to the doctrines of monetarism and ‘supply-side’ reform.

Here he is on tax cuts and incentives, taken from The Economic Consequences of Mrs Thatcher (1983), a collection of speeches made to the House of Lords (p. 9):

“Between 1880 and 1930, excluding the war years, hardly any new money was sunk into the coal industry or the iron and steel industry, and very little money – in comparison with Germany, not to speak of the United States – was put into the new technology industries which arose out of the invention of electricity, the motor car, heavy machinery, synthetic dye stuffs and other chemicals. Instead, vast sums were invested abroad. In some years during the Edwardian period, when home investment in manufacturing industry was almost zero, no less than 10 percent of our national income was invested abroad.

In those days there were incentives galore. However much Ministers may try to revive incentives through tax reductions, they can never hope to achieve the Victorian or Edwardian peaks in fiscal incentives, when income tax was not progressive and it was seven old pence in the pound or 3 percent instead of the present 33 percent. Yet with all those incentives, the economy was stagnating. If people think that we will now see miracles as a result of cutting income tax by, say, 3p or 6p in the pound, I can regretfully prophesy that it is more likely to make no difference whatever.

I have no doubt that without nationalisation we should have had the same situation after World War II as we had for 40 years before World War I and throughout a larger part of the inter-war years, and if one thinks that the period after World War II was bad, I can only say that in the opinion of all economic historians who have studied this matter seriously, the 20 years of the 1950s and 1960s showed more rapid economic progress and more rapid growth of productivity than any comparable 20 years in previous British history. That that was not just a reflection of a world trend is shown by the fact that while it was true of Britain, it was not true of Germany or the United States; in other words, their post-war record of productivity growth was no higher than had been achieved in previous periods. It was true in our case, and it is only in the last 10 years that our economic progress has broken down, for the reasons I mentioned (sic).”

Kaldor was not in favour of very high marginal rates of income tax, and instead favoured a progressive tax on consumption. However he was clear at the time that poor management was holding back British industry, and the problem, compared with our competitors, was ability rather than incentives.

Even today, the ‘burden’ of taxation in a number of European countries is higher than in Britain, and industrial performance has been notably more impressive. So other policies are more important, but successive Conservative and even Labour governments have failed to learn this.

All this remains relevant today, not least in the wake of the Trump tax cuts, and the turn to austerity in many countries in the wake of temporary fiscal stimulus following the 2008 crash. In Britain, cuts to public services were favoured over tax increases in the attempts to reduce the deficit. This surely reached its limit some time ago, with numerous crises across public services, from the health service to prisons.

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