Amity Shlaes: Tax cuts boost revenues

There aren't many sound commentators at the FT - you have to go to Sunday's The Business or America's Wall Street Journal for authentic, conservative capitalism - but Amity Shlaes is an exception on Britain's all-too-pink-paper.

Today, Ms Shlaes writes about the effects of George W Bush's tax cuts.  Because, you'll never guess... it has happened again.  "It" being the fact that tax revenues have risen after tax cuts.  The reduction in America's budget deficit from a "humiliating" 3.6%  of GDP last year to an "acceptable" 2.7% isn't because the President has finally vetoed a pork-stuffed spending bill.  His reluctance to trim spending has been a key weakness of his presidency.  The deficit improvement reflects tax-incentivised growth.

The thinking behind cutting taxes isn't rocket science.  Ms Shlaes says its simple: "Individuals respond to incentives".  Period.  Again and again "cuts in taxes on capital and work... inspire citizens and businesses to transact more".  The article doesn't just cite US experience.  It notes how Ireland and pre-Brown Britain "saw relative growth and tax revenues increase following rate cuts".  Ms Shlaes also notes how flat taxes have produced "compelling growth" for Russia, Romania, Estonia and Hong Kong.

The case for a UK flat tax has been noted elsewhere on this blog and was also made by Ian King in today's Sun.  King, The Sun's Business Editor, quotes the recent leaked HM Treasury report which said that flat taxes could "stimulate the economy and lead to increased employment".  George Osborne (who unearthed that report) is investigating whether a flat tax could work for Britain.  At least we can hope that he understands that tax cuts boost growth and will junk the static misunderstanding of the economy that characterised the last Tory tax policy.

Comments

[Selsdon Man]

"The reduction in America's budget deficit from a "humiliating" 3.6% of GDP last year to an "acceptable" 2.7% isn't because the President has finally vetoed a pork-stuffed spending bill. His reluctance to trim spending has been a key weakness of his presidency."

At last! A recognition on this site that Bush is a reckless spender - a quarter more than Clinton! Bush's modest tax cuts have led to substantially increased revenue. That's real supply-side economics. Imagine the effect of big cuts in basic rates!

Cut waste and government spending and the flat tax can be even lower!

[low taxes win elections]

Its not just the USA. Look at the rest of the world:

UK - 1980s - Nigel Lawson was a flattaxer before flat taxes were invented, vastly reducing tax rates, numbers of rates/bands, increasing personal allowances. As the Tory Manifesto 1987 said "In every case where taxes have been reformed and reduced there has been an increase in the amount of tax collected".

The number pages of UK direct tax law have increased by 377% since then.

Australia - cut corporate tax rates in 2000 and relaxed taxation of overseas investment - result far 86% more revenue in 2003 since 1997

Ireland - cut corporate tax rate to 12.5% from 32% - result boost in tax revenues - result scheduled to triple corporate tax revenues in only 10 years.

Japan - highest corporate tax rate in developed world, now collects only slightly more corporate tax than it did in the mid 1980s

US - prior to Bush's 2004 reforms, its rate of approximately 42%, ie federal and state tax, meant falling revenues in recent years.

The list goes on but the trend is clear, a pro-investment, low rate policy actually raises rather than reduces tax collection.

So when will a major Tory come out in support of tax reform!

[Peter Crombie]

Will the tories ever learn? Before the last election they 'made noises' about the need to lower taxes. I and thousands of others wrote to and emailed the Tory High Command saying you need a WOW factor i.e. Flat Tax but they funked it and may funk it again because Flash Gordon will steal their clothes. The saving grace is that the Blair / Brown cohort have 'done their time' and set up their redundancy / retirement fund at the tax payers expense. They are now 'sated'.

So.. whose next? Neither Clarke or Rifkind are too old and either would be good for the Party and for the country.

Me thinks the electorate will revert to wanting gravitas and experience.

Peter Crombie

[Sam Coates]

I sometimes wonder where the down side is to flat-rate tax, I mean, if it is so obvious that lower taxes bring higher revenues (which I do accept) then even Labour would want it.

[Editor]

It's probably the same mentality that ignores the evidence for the social benefits of marriage or the humanity of the unborn child, Sam.

It is, of course, also true that tax rises (up to a certain point) do raise revenues. It's just that we're past that point with most taxes that have incentive effects or can be avoided.

[Peter Crombie]

The 'downside' to flat tax is that it would make redundant 'ooo's of 'clerks in government service' and the private sector e.g. accountancy practices. It would weaken the core vote of Labour, which is why Labour do not want it.

Some people argue that Flat Tax would need to be 'high'and I ask why? Tax revenue as a % of GDP is 'X' and it is too high. So the Flat Tax % would need to be high. This is not an arguement against flat tax per-se. The arguement 'for' is obvious.
The problem is that Labour ministers lack the intellectual clout and management skills to understand what is going on. Just mendacious political time servers.
A relevant example. I note that a training organisation in London with a t/o of £20M are 'complaining' about a reduction in government grant and that they will need to implement redundancies. How does one address that? The t/o of £20M is not earned in the market place - it comes from the taxpayer as grants. Solution.. go out into the real world and earn your corn in the private sector.
Sir Peter Crombie