Monday, September 04, 2006

Dividing up the pie

Madsen Pirrie on the Adam Smith institute blog makes an interesting point about why the Conservatives are making a fundamental mistake when they talk about economics. It is a mistake that many Lib Dems make too- the idea that the economy is a fixed pie, so that any tax cut must be paid for either by spending cuts or by higher taxes elsewhere.

Although I often find the ASI's commitment to tax cuts above all else to be impractical politics, it is worth pointing out that sometimes tax cuts can lead to an increase in overall tax revenue. This is the theory behind the Laffer curve, which seems to have received substantial confirmation in the results of taxation policies in Estonia, Slovakia, Romania and other countries that have followed a flat and low tax agenda.

One thing that can not be argued is that complicated tax systems become very expensive- a fiscal drag that can have very significant consequences. Therefore whatever the political agenda- flatter taxes, higher taxes, strongly progressive taxes- the key to the success of any of these policies is going to have to be simple taxes. A fact that was lost on Gordon "tax credit disaster" Brown some years ago.

3 comments:

Edis said...

One problem for me with the Laffer Curve is that the name irresistably reminds me of Laffan's Plain as in the Corps of Royal Engineers song:

"For we're marching on to Laffan's Plain, To Laffan's Plain, to Laffan's Plain,
Yes we're marching on to Laffan's Plain Where they don't know mud from shit."

Come to think about it "not knowing mud from shit" is a good summary of New Labour economic policy...

Edis said...

One problem for me with the Laffer Curve is that the name irresistably reminds me of Laffam's Plain as in the Corps of Royal Engineers song:

"For we're marching on to Laffan's Plain, To Laffan's Plain, to Laffan's Plain,
Yes we're marching on to Laffan's Plain Where they don't know mud from shit."

Come to think about it "not knowing mud from shit" is a good summary of New Labour economic policy...

Bernie Hughes said...

"Therefore whatever the political agenda- flatter taxes, higher taxes, strongly progressive taxes- the key to the success of any of these policies is going to have to be simple taxes."

This is exactly right. Even starting out from the simple assumption that the total tax-take remains level initially, simplifying the system makes it easier to collect a greater percentage of the money owed, and costs less to administer. So, next year, the option to reduce tax levels without any fall in expenditure is workable.