Larry Elliott taxes the rich a bit more - again

The most economically literate journalist the Guardian has - and it's not saying much - is Larry Elliott.  This morning he weighs into the debate about taxing the rich.  I wrote a couple of weeks ago ("Labour's missing billions and the privileged few") about the problems inherent in this.  Elliott unwittingly confirms my conclusion - which was that increasing top rates of tax for high earners won't solve our fiscal problems.

He reports the conclusions of an IMF report which suggests that the rich, particularly in the US, might be undertaxed, quoting the following passage: "The implied revenue gain if top rates on only the top 1% were returned to their levels in the 1980s averages about 0.25% of GDP, but the gain could in some cases . . . be more significant".

"Applying the IMF's formula to Britain", writes Elliott, "would mean that the exchequer would raise an additional £4bn from taxing top earners".  If the IMF are right (although, as my "Labour's missing billions" post pointed out, an HMRC report from 2012 suggests that putting up top tax rates to 50% might actually have lost the Exchequer money rather than raised any extra), "applying the IMF's formula to Britain would mean that the exchequer would raise an additional £4bn from taxing top earners, since 1% of national output is about £15bn".

In case you think this is a large sum of money, it isn't.  Even Elliott admits "This is not exactly a fortune". What he doesn't tell Guardian readers (assuming any of them actually read the economics page) is just how small a sum it is.  The UK has to borrow £4bn on the money markets about every ten days just to keep going.

So when you've taxed the rich a bit more, then what?

The idea that the massive gap between what it takes to run Britain (as currently constituted) and the nation's income can be filled by taxing the rich more is the political equivalent of one of those 19th century quack cures like Ward's Drop.  People want to believe it will work, but they don't want to know too much detail in case the detail reveals that it won't.  That's why Elliott left "This is not exactly a fortune" to his last para and didn't enlarge on the consequences.  He could for example have pointed out that even raising an extra £4bn still left a further £116bn unfunded at current deficit levels.

The maths imply only four choices for us.  One, tax everyone a lot more, and not just the rich.  Two, cut spending.  Three, a combination of one and two.  Or four, go bust.