The Taxpayer’s Alliance and others have called for the Treasury to develop a dynamic model of taxation at the weekend. But as is so often the case when the self interested talk about tax there are a number of serious flaws in their logic.
Firstly, they are a little na?Ã˜ve to assume that the Treasury do not take the consequences of their decisions on the tax code into account when undertaking their economic forecasting. To the best of my knowledge they do, and in a dynamic fashion. What they might not do, however, is assume that any cuts in tax rates automatically lead to growth, which is the assumption that the Taxpayer’s Alliance are asking be built into the Treasury’s work. The absence of any sophisticated analysis suggesting that this assumption is true might explain the reluctance of the Treasury to adopt it and the very limited resources the US is willing to dedicate to investigating it.
Secondly, it is disingenuous to ask for a model dedicated to modelling dynamic impacts of taxation decision making that would only be asked to consider the possibility that tax cuts do lead to growth. Such a narrow focus is clearly inappropriate. The consequences of changes in the tax code are much wider than any implication they have for growth. Dynamic modelling should also consider questions relating to:
1. the distribution of the tax burden within our society;
2. the impact on different types of business and the long term implications of that with regard to attracting sustainable inward investment to the UK rather than transient profit flows;
3. foreign relations if the intent of any change is to undermine the income stream of other nation states as Ireland has done,
4. whether taxation will, if inappropriately used as an incentive result in the misallocation of resources by some sectors in society resulting in an overall reduction in welfare in the UK and internationally.
I would welcome dynamic modelling that addresses these issues, but that of the type requested by the Taxpayer’s Alliance appears to be a policy prescription blinkered by a failure to consider the wider implications of taxation policy, and that can be of no benefit to the Treasury, the UK or the world at large. As such, it is not a serious policy suggestion but is instead, rather like the same organisations proposals for a flat tax, a simple bit of wishful thinking.