Should We Cut Taxes to Increase Revenues?

Counter intuitive though it is, there have been arguments as to whether cutting incremental rates of income tax can actually raise tax revenues since the days of Adam Smith and “The Wealth of Nations”. It could be argued that JFK, Ronald Reagan, Margaret Thatcher and Nigel Lawson (amongst others) all subscribed to this view and that at least some of them adopted it during their time in government with considerable success.

Logically, raising taxes does not always raise revenue. After all, if the tax rate was 100% nobody would work or be paid and revenue would be zero.  If the tax rate was zero, then revenue would obviously be zero as well. This means you must have a curve between these two points and an optimum point where revenue will be maximised. This is called the Laffer curve.

 One wonders whether the government, or the media, have done any research to discover where on this curve the UK currently lays and, therefore, the true effect of tax hikes this year? If you are the wrong side of the curve, then it is by cutting tax that you stimulate business, the economy and ultimately increased revenue.

Take the example of Nigel Lawson’s budget in the 1980’s, where the top rate if income tax in the UK was reduced from 60% to 40%... One of my fondest memories of the 1980’s!

Reductions in taxes at this time helped create a period of prosperity known as the "Lawson Boom". At that time, the top 1% of earners in the UK contributed 14% of income tax revenues. The predicted figure for 2009, with no changes in the top rate of tax since that budget, is that the top 1% of earners will contribute 24% of revenue and the top 10% of earners will account for 54% of the total.

These are not figures you hear from the Chancellor, Alistair Darling, when he addresses these issues.

At the moment, all the leadership candidates for the next UK Government seem agreed that higher tax rates are necessary. Sadly, this seems to be receiving far more focus from them than any serious plans to reduce spending, which is surely the only way major budget deficits can be significantly impacted over the longer term. .

 UK taxpayers who earn over £100,000p.a. Will see their net income reduced by up to 13% this year by the introduction of; higher income tax, higher national insurance and the removal of personal allowances. Yet the expected revenue from this is already being lowered to figures where the whole exercise begins to look like no more than political expediency. “Hit the rich and make them pay their fair share” will always be a popular policy with a lot of people. As to whether it’s a fair policy- see the figures above for how much the richest people already pay and decide for yourself. Currently raising taxes also capitalises on the outrage at excesses by a small number of people in the financial sector, whether justifiable or not. Defending the morals and ethics of bankers in the UK nowadays is a real uphill struggle. However, is a policy being popular a good enough reason for introducing measures which to very little to help solve our budget problem- and may even have the opposite effect to that intended?

This is not a blanket defence of the rich. There have been excesses, a fundamental failure to understand the general public’s perception of the financial industry and a staggering lack of sensitivity and common sense in some quarters. However, the large bonuses some bankers have been paid did not cause the current recession and the recent credit crisis. The payment of those bonuses didn’t bring about the current budgetary and debt problems in the UK. Taxing those bonuses and their recipients, whilst hurling vitriol and blame around, won’t solve the problems either- much as some politicians might wish it would. It’s time for our leaders to get over it and put some real policies in place instead

Like, maybe, considering some tax cuts to stimulate the economy and future revenues? Just a thought.