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What the pathway to lower taxes looks like

by Paul Goodman

George Osborne headshot Tim, Boris Johnson, John Redwood, Douglas Carswell and others have been pressing George Osborne to show a route map to lower taxes (generally) and make some budget tax cuts (specifically).  I suspect that the Chancellor will indeed announce some tax help for motorists and businesses.  He's unlikely, however, to move on the 50p rate, largely because the Liberal Democrats are opposed to him doing so.  I've written before that the Coalition's tax policy is creating disincentives to earn: it's right to take poorer people out of tax altogether, as the Liberal Democrats, but wrong for them to then lose money to the state as they try to climb the income ladder, either because rates are too high or because of fiscal drag.

So political pressure should be brought to bear on the Liberal Democrats over income tax rates, and the 50p rate in particular - which brings us back to that route map.  During his budget speech last year, in relation to the Capital Gains Tax increase, Osborne said -

"I asked the Treasury to examine what would happen if we had increased the rate much further beyond 28 per cent, and their dynamic analysis showed that this would have resulted in smaller total revenues."

I like that "dynamic analysis" - not surprisingly, since I called for a broader one to be carried out during the budget run-up.  That, however, was not to be: the Treasury has traditionally been chary of such exercises, although at least one was carried out under Labour.  I remember Ministers arguing during my finance bill days in Opposition, which have been on my mind recently, that increasing duties on cigarettes beyond a certain point would decrease revenue, since smokers would turn to smuggled or counterfeit tobacco.  They were right about that, if wrong about much else.

So here's how the Osborne can logically extend the "dynamic analysis" he announced last year, and help build political pressure for the scrapping of the 50p rate and the raising of the 40p threshold.

  • The Chancellor should announce during the budget the first-ever formal Treasury study - a "dynamic analysis" - of the effects of lower tax rates, including of course income tax rates, on revenue.
  • He should add that the study will produce a series of reports, and that the first will be published at the time of the Pre-Budget Report during the autumn.
  • And add, furthermore, that he's written to the Mayor of London asking for his input.
  • It looks to me from the Treasury website that David Gauke would be the most suitable Treasury Minister to oversee this process, since it dovetails most neatly with his responsibilities.  He'd do it very well.  But if Osborne wanted to create a media stir and draft in some help he could do a lot worse than call on Lord Forsyth.
  • I'm not asking anyone to break Parliamentary protocol (heaven forbid) by suggesting that this process would be accompanied by media stories and features, commentators being briefed, opinion articles by Ministers when appropriate, support from friendly think-tanks and journalists, and so on.

I appreciate that evidence for the lower-taxes-leads-to-higher-revenues has been set out many times before.  But not by the Treasury, which I believe would follow suit.  And a Government study is needed to help to get Nick Clegg, in particular, off the Liberal Democrats' 50p tax rate hook.  It's easy for Ministers to dispute outside studies.  But harder for them to quarrel with those carried out within government itself.


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