Raising revenue by lowering taxes

At Blackpool at Party Conference, we changed the terms of trade in the tax debate.  George Osborne announced the abolition of Inheritance Tax (well almost), and the Party was stunned by its own success.  Suddenly Labour and Alistair Darling were scrambling to match our tax promise.
Yet for years (until the Conference), the Conservative Party had been cowed into submission by Labour on the tax issue.  Labour had a very simple and effective ploy.  Every time Conservatives mentioned tax cuts, Labour said “Which schools and hospitals will you close?” — and we retreated in disarray.  But the question is a nonsense, and it is time to expose it.
Labour’s implicit assumption is that the economy is static.  You can change one thing, but nothing else changes.  So you reduce a tax rate, say from 30% to 20%, and your revenue simply goes down by a third.  Or you increase income tax rates (this is a Lib-Dem favourite) on salaries over say £100,000, and simple arithmetic tells you that you have millions more to spend on education.
But the economy is not static.  It is dynamic.  Change a tax rate, and you change a whole raft of incentives.  People do different things, and the effect is much more complicated than simple arithmetic.  Let’s say you reduce income tax rates.  First of all, people on higher incomes will spend less time and money on legal tax avoidance or illegal tax evasion, and perhaps more time on productive and remunerative work.  People on the margins of employment will have more incentive to work, to claim less welfare and start paying tax.  People in the black economy may decide that the risks are no longer worth the tax avoided, and go legit.  Aspiring entrepreneurs will find capital accumulation easier, and the rewards for risk-taking greater.  They will start new businesses and employ others.  And critically in the face of globalisation, international investors will find Britain more attractive, and our share of FDI, already large, will tend to grow.
When Ronald Reagan argued that lower tax rates would deliver higher revenue, his opponents called it “Voodoo Economics”.  Usually we say that if a deal sounds too good to be true, it probably is.  New lamps for old.  Higher revenues for lower tax rates.  But this elegant economic theory actually works.  At my Transatlantic Conference in Brussels in early October (see “International Leaders’ Summit” earlier on the blog), Dan Mitchell of the Cato Institute (www.cato.org) presented data from dozens of countries over decades, which proved beyond doubt, again and again, that the theory works in practice.  Low tax rates lead to faster growth and higher revenues.  In the USA under Reagan, in the UK under Lawson, in Russia and China more recently, and lately in a host of countries, especially in central Europe, low taxes and flat taxes have been proven to raise growth and raise tax revenues.
At the Conference we had Mart Larr, former Prime Minister of Estonia, who introduced flat taxes almost by mistake, but with huge success.  He had read only one book on economics, which happened to be by Milton Friedman.  Mart assumed that flat taxes were Western economic orthodoxy, and was taken aback when he was hailed as a pioneer of the flat tax movement.  Since then some twenty countries have adopted the flat tax.  Poland’s new Civic Platform government has announced it will do the same.  Flat tax in conquering the world because it works.  It makes people more prosperous, and provides governments with higher revenues to fund social services.  Maurice McTigue, former Finance Minister of New Zealand, told us how his government was almost embarrassed by the overflowing treasury they experienced as a direct result of reducing taxes.
With countries across the world lowering taxes, it becomes imperative that we in the UK follow suit merely to stay competitive.  We should turn Labour’s question around.  How will they continue to fund public services unless they join the low-tax revolution?
It is time for the Tory Party to stop parroting cliché that “We will put financial stability before tax cuts”.  The truth is different: we won’t achieve financial stability without tax cuts.

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4 Responses to Raising revenue by lowering taxes

  1. jorgen says:

    Couldn’t agree more. But we would need to get rid of Cameron and Osborne to make this happen!

  2. Roger Helmer says:

    Thank you Jorgen. I am confident that George Osborne understands the flat tax case. But the Party is naturally very cautious on this issue, having allowed the Labour “schools’n’hospitals” lie to gain currency.

  3. Richard Hyslop says:

    Taken from a reecnt article I wrote:

    Last year Tax Freedom Day took place on June 3, its latest date since 1988. The average British worker now spends over five months of the year purely working to meet the ever growing demands of the Chancellor of the Exchequer.

    Tax Freedom Day however did not take place on June 3 for Britain’s poorest 10%; it fell over a week later, as the poor pay a greater percentage of their income in tax. This is a disgrace. If we want to help the most vulnerable in society, lowering taxes is one of the best ways to go about it. Lower taxes generate increased revenue and wealth, at the same time as lifting people out of poverty in a more lasting way than any government benefit scheme.

    Research carried out by The TaxPayers’ Alliance shows that a poor household will pay on average £250,000 in taxation over the course of a lifetime. Families work hard for their money, they should be able to keep more of what they earn so that they can improve their lives, rather than having to hand so much over to politicians who only waste it. Wanting to keep more of your hard earned money, to spend on the things that you think important should not be seen as selfish. Low taxes should be the foundation of a compassionate and free society.

    Lower taxes should not be seen as a desirable extra when times are good; they are a prerequisite for a sound economy. Low taxes encourage people to work, save and invest and if you keep tax rates down the economy grows more quickly. Low taxes also reduce both the opportunity and the incentive for tax avoidance so revenues increase. At the last general election the Liberal Democrat Party said they wanted to raise the top rate of tax for 40% to 50% to raise extra money for public services. The Conservative Party when in power was able to generate the same amount of money by lowering the top rate of tax from 60% – 40%. If people pay less tax, and keep more of their own money, they have more incentive to work and unemployment falls as new jobs are created. Low taxes also make Britain a more attractive country for inward investment which in turn generates jobs and income.

    High taxes only serve to penalise the successful while providing little incentive for those on less money to earn more. In the end high taxes make us all poorer, as Dick Cheney recently remarked, “no nation ever taxed its way to prosperity”.

    The saying goes that nothing is certain in life apart from death and taxation; we are born free then taxed to death. Low taxes do not just make economic sense they are a moral imperative.

  4. Pingback: Tax cuts and the effect on the economy

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