Kwasi Kwarteng MP: The middle class will drag us out of recession if we don't drag them into high tax bands

Kwasi Kwarteng is Member of Parliament for Spelthorne.

I was very pleased to see Tim’s reaction to our paper “Motivating the Middle” (bottom of this post). Tim is right to say that we should be looking at relief in difficult times for many people on low incomes who are going out to work.

Obviously, as a low tax party, we should strive to reduce taxation, wherever we can, in a way that does not imperil the public finances. We should be seeking to lower taxes across all levels of income, so that individuals can exercise more control over the fruits of their own endeavours.

While wishing to lower taxes across the board, we should recognise that it’s the middle class upon whom the heavy burden of taxation has increased most dramatically in the last 30 years. The increase in public spending has been paid for by more and more people, who are not rich, paying a tax rate originally designed to be paid by the genuinely wealthy. I do think that it is a matter of concern that, according to the IFS (Institute for Fiscal Studies), the number of people expected to pay the 40p rate is expected to rise from 3.7m in 2011 to 5m in 2014. In the long term, this could sap the spirit of ambition.  

In Germany, they have a word - Mittelstand - which refers to small and medium sized companies. Most German politicians instinctively understand that the Mittelstand is, in many ways, their secret weapon. Its fortunes largely determine the success or otherwise of the German economy.  

Our “Motivating the Middle” paper also addresses what is called “fiscal drag” in small/ medium sized companies.  Tax rates have not gone up with inflation, and so more and more smaller companies, as they get slightly bigger, pay more tax just at the moment when we should be encouraging them to succeed.   

This isn’t about bribing the electorate, it’s actually about trying to improve the long term performance of our economy. Edward Prescott, the Nobel prize for Economics winner in 2004, has published research which suggests, putting it very simply, that if you tax people more then, over time, they will work less. This may seem pretty obvious. But it’s the exact opposite of what we have actually been doing over the past 30 years.

Prescott look in a detailed way at French, German and American tax levels and work rates over the last 30 years.  In the 1950s the French and Germans worked harder than the Americans. Over time Prescott found that this position was reversed. You might say that there were other factors involved: greater prosperity in France and Germany, it could be argued, allowed them to work less. But Prescott showed that faster declining tax rates in America played an important part.     

The Germans and the Americans recognised the power of the middle class. It’s time that we should too.

Who are these middle earners? Yes, by definition they are not the very lowest paid. Some of them have done well, and have respected jobs. Yet they form the backbone of the British economy. They are middle managers, middle ranking police officers, deputy head teachers, small businessmen and a range of others. Crucially, they work in both the public and private sector. They try and do the right thing. They get up early, place themselves on crowded trains or buses to get to work. They generally have the sense of responsibility which the Conservative Party has always encouraged.

In the tax debate, we tend to focus on both ends of the economic spectrum. We had a debate about reducing the 50p rate for the highest earners, and we have pledged to take the very lowest paid out of tax altogether. It’s the middle layers that often get left out of consideration, but in most societies, over time, it’s this same middle class which has been crucial in improving general living standards for everybody.

This isn’t about “trickle down” economics, where policies favour the rich and the so-called wealth creators. It’s about recognising the immense contribution of the middle class to the economic development of a modern nation.