March 1, 2024

Economix Blog: The Legend of Margaret Thatcher

Today's Economist

Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul.

Former Prime Minister Margaret Thatcher of Britain, here in 2008, is venerated by many conservative Republicans in the United States.Former Prime Minister Margaret Thatcher of Britain, here in 2008, is venerated by many conservative Republicans in the United States.

Republicans have always admired former Prime Minister Margaret Thatcher of Britain. Her 1979 election excited them enormously; Republicans viewed it as proof that their views were on the upswing and greatly increased their confidence that Ronald Reagan would be elected president in 1980 as part of a worldwide conservative trend.

Mrs. Thatcher’s stature among the American right has only increased since she was ousted by her own party in 1990. This is especially true now. Benjy Sarlin of Talking Points Memo says Mrs. Thatcher “has always been a popular figure in Republican circles across the pond, but she seems to have taken on a new relevance in recent years for the party’s leading lights.”

Mr. Sarlin cites a blog post on Mitt Romney’s Web site that draws a parallel between economic conditions in Britain in the late 1970s and those in America today. He reports that Newt Gingrich and Rick Santorum also invoke Thatcher’s name frequently in their quest for the Republican presidential nomination. And last month, Sarah Palin publicly requested a meeting with Thatcher that fell through because of Mrs. Thatcher’s physical condition.

While Mrs. Thatcher is a towering figure in British political history, well deserving of admiration, the conservative legend about her time in power is at odds with the facts. In this legend, she was even more aggressive than Reagan in cutting taxes and the welfare state. But that is not true.

As this table shows, taxes as a share of the gross domestic product in Britain actually increased sharply during Mrs. Thatcher’s first seven years in office before falling in the later years. Even at the end, they were significantly higher than they were when she took office. Spending also rose during her first seven years before falling in Mrs. Thatcher’s later years.

Institute for Fiscal Studies

To those familiar with Mrs. Thatcher’s tax policies, these data are not surprising. Although she cut the top personal income tax rate to 60 percent from 83 percent immediately upon taking office, the basic tax rate was only reduced to 30 percent from 33 percent. And in 1980, the 25 percent lower rate of taxation was eliminated so that 30 percent became the lowest tax rate.

More importantly, Mrs. Thatcher paid for her 1979 tax cut by nearly doubling the value-added tax to 15 percent, from 8 percent. Among those who thought Mrs. Thatcher was making a dreadful mistake was the American economist Arthur Laffer. Writing in The Wall Street Journal on Aug. 20, 1979, he excoriated her for taking with the one hand while giving with the other.

“The Thatcher budget lowers tax rates where they have little economic consequence and raises tax rates where they affect economic activity directly,” he complained.

In the 1982 forward to the British edition of his American best-seller, “Wealth and Poverty,” George Gilder was also highly critical of Mrs. Thatcher for failing to cut either taxes or spending: “The net effect of the Thatcher program has been a substantial increase in taxation on virtually all taxpayers.”

Although Mrs. Thatcher privatized many British industries and businesses that had been nationalized after World War II and sold off much of Britain’s public housing, in which the bulk of the working class lived, she did little to reduce the size of the nation’s welfare state.

In particular, Mrs. Thatcher, like all the members of her party, strongly supported the National Health Service, which provides national health insurance for every Briton.

A review of long-term spending trends in Britain by the Institute for Fiscal Studies shows that Mrs. Thatcher basically flattened a trajectory that had been rising since the war. That took a lot of political effort even though her party controlled Parliament and the prime minister of Britain has far fewer constitutional constraints than an American president. But at the end of the Thatcher era, the welfare state was still intact.

As Martin Wolf, a columnist for The Financial Times, told me, “Like all great politicians, Thatcher was a pragmatist, not an ideologue, who picked her fights carefully. She recognized that any head-on attack on the welfare state would have destroyed the party’s electability.”

Mr. Wolf said Mrs. Thatcher was far more concerned about fiscal stability and deficit reduction than lower taxes, and the idea that a debt default “would have been sensible would, to her, have been insane.”

Mrs. Thatcher, like Reagan, moved her country in a conservative direction. But Mrs. Thatcher’s fiscal accomplishments were much more modest than many of today’s Republicans think.

The lesson they should learn from her is that it is very hard to shrink the size of government even when a strong leader has complete control of the legislature, that it takes many years of arduous work to do so and that at the end of the day it won’t shrink very much.

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Economix Blog: Romney’s Tax Bill, European Style

5:46 p.m. | Updated to correct income figure for Liliane Bettencourt.

PARIS — Perhaps it’s no surprise that the Republican presidential candidates Mitt Romney and Newt Gingrich have been so vociferous in warning against what they deride as President Obama’s efforts to turn the United States, as Mr. Romney put it, ‘‘into a European-style welfare state and have government take from some to give to others.’’

Because one thing is for sure: if they lived in Europe, they’d be paying more taxes.

View From Europe

Dispatches on the economic landscape.

We spoke with tax experts in Germany, France and Britain about how much tax they would expect a citizen of their countries to pay on an income similar to Mr. Romney’s. The short answer is, millions more.

None of our tax advisers, all of whom deal with wealthy clients, wanted to be identified, and they cautioned that there was no way to give more than a ballpark estimate without studying Mr. Romney’s tax forms in more detail themselves.

But for the sake of a simple comparison, let’s start with France, which has a top income tax rate of 48 percent, and a capital gains tax rate of 19 percent. (All income is also subject to a 13.5 percent social security tax that helps to pay for things like pensions, unemployment insurance and health care; in the United States, by comparison, the top ordinary income rate is 35 percent and the capital gains rate is 15 percent. Only the relatively small Medicare tax is applied to all earned income, while in 2010 and 2011 Social Security tax applied to only the first $106,800 of wage and salary income.)

In Paris, the hypothetical M. Romney’s effective tax rate would probably have been in the neighborhood of 35 to 40 percent, including the social security tax. While much of his income derived from capital gains, his dividends, interest and income from his private-equity holdings would mostly be taxed at ordinary income rates. At 40 percent, his bill would have been about $8.6 million. (France also gives generous tax credits for large families, but M. Romney’s five children are all adults now, so that would not be of much use.)

In the United States, Mr. Romney paid $3 million in income taxes on his 2010 income of $21.6 million, for an effective rate of 13.9 percent. His Social Security and Medicare tax bills would have been trivial by comparison.

In Britain, income tax rates top out at 50 percent. But most likely, a top London tax lawyer told us, the effective rate would be significantly lower, since Mr. Romney’s income from capital gains would have been taxed at 18 percent to 28 percent.

So, he said, an educated guess would produce an effective tax rate for Mr. Romney of ‘‘probably 30s rather than 40s.’’ At 35 percent, the tax on Sir Mitt’s $21.6 million would add up to about $7.6 million.

In Germany, high-earning workers pay individual income tax rates of up to 45 percent, though our adviser — a lawyer in Frankfurt with a top international firm — noted that an additional ‘‘solidarity surcharge’’ is tacked on top of that for an effective top rate of 47 percent. Mr. Romney, however, would benefit from the lower rate applied to private capital investments: 25 percent, with the solidarity surcharge bringing it up to about 26.4 percent. With most, but not all, of his income treated as capital gains, Herr Romney would probably pay about 30 percent, or $6.5 million.

As for Mr. Gingrich, who paid 32 percent in federal income tax on his $3.14 million in income, he would face mostly ordinary income tax rates in Europe, so he would probably have to fork over about 40 percent of his income if he lived in one of the major European countries.

Of course, many wealthy people find ways to avoid the tax collector (legally and illegally), even in the dreaded European welfare states. Just ask officials in Greece and Italy.

In fact, Mr. Romney may even have competition: Liliane Bettencourt, heiress to the L’Oréal fortune and the richest person in France, made headlines last year with reports that she paid only about 4 percent in taxes on an income of nearly 250 million euros, or $324 million.

After the uproar, Ms. Bettencourt and some other members of the French wealthy elite took a page from Warren Buffett’s book, and asked the government to raise their taxes.

This post has been revised to reflect the following correction:

Correction: January 25, 2012

An earlier version of this post misstated Liliane Bettencourt’s reported annual income. It was in the hundreds of millions of euros, not hundreds of billions.

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