Tax-cutting Tories love the Laffer curve. Just in case your memory needs refreshing, Mr Montgomerie has a helpful link here.
Laffer's key insight is that after a certain point, tax increases act to reduce government income due to avoidance, evasion and the deadening effect on the economy. Thus by cutting taxes one can actually increase government revenue, the upshot being that tax cuts pay for themselves.
What the Lafferites tend not to dwell on is that the bell-shaped curve has a left side where the opposite conditions hold true, meaning that tax cuts certainly do not pay for themselves. Thus what tax cutters need to demonstrate is not the existence of the Laffer curve, but which side of it we're on.
Now, I'm no economist – and no doubt some bright spark from the TaxPayers' Alliance can put me right – but I can't help noticing that Gordon Brown keeps putting up our taxes and increasing the government's revenue at the same time. This rather suggests that we're still on the left side of the Laffer curve – or, at least, have been until now.
Of course, all this extra tax may well be hurting the long-term growth rate of the UK economy and hence the tax base. However, for the purposes of medium term fiscal policy, this doesn't mean that tax cuts pay for themselves. Tax cutters still have to say what they'd cut in terms of spending or raise in terms of borrowing in order to fund their tax cuts.
I'd love to be wrong on this.
