Letter: Good tax makes bad politics

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The Independent Online
Those of us sympathetic to the ideas put forward by Cornell University's Professor Robert Frank in his new book, The Winner-Take-All Society, may nevertheless be bemused by his claim to originality ("Drive an Escort, not a Ferrari, and be happy", 16 June). Your reporter asks him why, if the idea was so simple, nobody had suggested it before. "Because," he says, "conventional economists don't understand people ... the economic establishment doesn't acknowledge that satisfaction depends on position." Instead it assumes satisfaction depends on how much you have in absolute terms.

Up to a point, professor. The late Fred Hirsch was surely the writer who thought up the concept of positional goods: that we like rare and unusual things because they are rare and unusual. And Professor Frank's proposal for an expenditure tax - on income less savings - has an even longer pedigree, stretching back to Hobbes, who argued that people should be taxed according to the resources they absorb (expenditure) rather than what they contribute (income). Many distinguished economists were in favour, including John Stuart Mill, Marshall and Pigou.

The economist most associated with the idea's modern form is the best economist who never won the Nobel prize, Nicholas Kaldor. He revived it in 1955. The late Professor James Meade (who did win the Nobel prize) set up a committee which published its proposals for precisely such a tax in 1978. All of which suggests that Professor Frank may be excessively confident in asserting that "eventually ... we'll look back and say 'how could we not have stumbled on to this earlier?'"

The practical, political problem in the proposal is that if we were to make all savings tax deductible (as pensions contributions are now), we would reduce the income tax base and tax rates would have to go up. Since only one mainstream political party is brave enough to advocate an income tax increase, and then only by one penny in the pound, this seems unlikely. Apart from that, the expenditure tax is a marvellous idea. Like the land value tax (another marvellous tax waiting for Professor Frank to stumble across it), it will delight generations of economists for years to come.

Christopher Huhne

London EC2