Popular politics poor policy

Good politics can be bad policy.

Damien Grant makes this point in commenting on Labour’s imprudent policy to raise the top marginal tax rate from 33 cents to 39 in 1999.

This was politically popular with people who earned less than $60,000 and the army of indolent people who thrived under the fifth Labour Government. The idea was to raise more money from the wealthy. It failed.

Government revenue did rise, from 31 per cent of GDP in 1999 to a high water mark of 34.5 per cent in 2006 but this extra tax was not paid by the rich, it was paid by the middle class, workers in PAYE jobs who lacked the ability or creativity of the wealthy and self-employed to do what any self-respecting plumber does – evade tax. . .

Avoid maybe, evade no – that’s illegal.

. . . The share of tax paid by top income earners did not increase once the top rate of marginal tax was raised. More importantly, the cost to the economy of each dollar raised at the rate of 39c was more than the tax collected. Total tax revenue rose as middle-income earners moved into the top tax bracket because of inflation.

When the top tax rate decreased to 33 per cent, the level of tax paid by the top 10 per cent remained the same. . .

The policy might have been good politics, dog whistling to the sock-the-rich constituency. But it didn’t cost the rich as it was intended to and did cost middle-income earners, some of whom then became eligible for welfare through Working for Families.

It would have been far better for those individuals to leave more money in their pockets than churn it though the tax and welfare systems.

And it would have been far better for the country to have people concentrate on maximising their income rather than welfare receipts nor  minimising their tax liabilities.

If good politics can be bad policy the reverse is also the case. Good policy can be bad politics.

That is why we don’t subject all policy to referenda.

Sometimes the majority isn’t right and it needs a government strong enough to stand up for the minority to enact good policy in spite of the politics.

It is possible to get good policy which is also good politics. A government which manages that by taking people with it is a government which is better placed to last more than a term or two.

That might be more likely in these tough times because fewer people are likely to be swayed by vote-buying election platforms when they no there’s no latitude for belt loosening.

But it takes an educated and willing public to buy good policy that’s bad politics which is why bad policy that’s good politics still sells.

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