Norman Lamont, Boris Johnson (and Janet Daley) argue cogently that the vital ingredient which the economy needs to kick-start growth — and actually to prevent businesses decamping to more tax-friendly environments — is tax cuts.
Danny Alexander, the Lib-Dem Chief Secretary of the Treasury, on the other hand, argues that these calls for tax cuts are “Cloud-Cuckoo Land”. He adds for good measure that any tax cuts contemplated by the Coalition would focus on low earners, not on high earners.
Sadly, it is Danny Alexander who is living in Cloud Cuckoo Land. Like his Lib-Dem colleague Vince Cable, he shows an alarming ignorance of basic economics for someone in his position.
We need to distinguish between cuts in tax rates, and tax cuts involving real reductions in revenue. They are not the same thing at all. The first focus of the calls for tax cuts is the 50% rate on salaries of £150k+ (though we should not forget the marginal rate of over 60% on salaries between £100k and £113k, which results from the ham-fisted claw-back of personal allowances). This would be a cut in tax rate, but at zero cost to the Treasury — indeed it would probably increase revenues, as it would promote inward investment and economic activity, and might help to prevent financial services companies from moving off-shore.
It should not therefore be seen as an either/or alternative as against cutting taxes for the low-paid. In fact tax cuts for the low-paid might also fail to reduce revenues, or reduce them less than simple arithmetic would suggest, because tax cuts anywhere in the salary range promote participation in the labour market, along with prosperity and growth — though the case is less clear-cut at low income levels than with the 50% rate.
I’m all in favour of taking low earners out of taxation as far as possible, and I applaud the Lib-Dem policy of raising the basic personal allowance to £10k. George Osborne should do that as soon as, in his judgement, he is able to do so. He should also take into account the growth effect of such a move and not be seduced by the “static model” assumption based on simple arithmetic.
But the 50% rate on £150k+ salaries should be repealed now, because it raises no revenue, and because it acts as a sheet-anchor depressing recovery, investment, prosperity and growth. It is a no-cost action with immediate economic benefits, and there is no excuse whatever for delay. Osborne and Cameron have held back for purely presentational reasons. They know what they need to do for economic recovery: they should have the courage to get on and do it.
Meantime Alexander and Cable should study some basic economics.