April 25, 2015

Natural sources of inequalities are more than enough for us to carelessly layer manmade ones on top

Sir, Tim Harford writes that “Anthony Atkinson is right to say that the evidence doesn’t conclusively rule out… that a 65 percent top rate of tax is likely to be counterproductive”, “The Truth about inequality” April 25. 

For anyone trapped one way or another in the UK, that might be valid. But anyone with a fair or unfair capacity to generate earnings and who is thinking about living in England, that certainly gives him reasons to think again. That some have to pay higher taxes than other could be reasonable, but it is not really about equality either.

I consider that in discussions about inequality it is always important to try to classify its origins as natural or manmade. For instance those perceived as risky from a credit point of view will always have less access to bank credit and will always have to pay higher interest rates. And that is natural, because it is natural that banks should give the loans to those who pay them the best margins after all costs, including credit risk premiums.

But regulators have decided that a bank should also be allowed to leverage its equity, and the support its receive from taxpayers, much more with margins paid by those perceived as safe than with margins paid by those perceived as risky. And that signifies a manmade source of inequality. Those perceived as risky, like SMEs and entrepreneurs, consequentially face even less access to bank credit and even higher relative interest costs. Any society that believes that’s the way to go has clearly gone bonkers.