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?Øve 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.
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Hi Richard
Interesting blog, that I’ve only just discovered.
But on dynamic tax modelling, I think you’re wrong about HMT’s approach. Although Brown made all those statements about post neoclassical endogenous growth theory, they take no account of it in their forecasting.
In fact they follow the traditional HMT approach which is to assume long-run growth is a given- ie exogenous.
What the TPA is saying is not that everything else should be ignored, but that it’s about time HMT paid some real attention to all the work from the last ten years (including from the OECD, see TPA site for references) which shows a clear link between tax and long-run growth rates.
Incidentally, there’s an interesting post on the TPA today drawing attention to the spectacular growth in US tax revenues following Bush’s tax cuts. Laffer ain’t in it.
PS What’s this “self-interested talk” stuff? I’ve met the guys from the TPA, and I can assure you they are not offshore plutocrats- they just happen to believe that lower taxes and smaller government would be good for everyone. The many not the few etc. A different view to yours yes, but you can’t just write it off as self-interest.
Wat
Sorry – but I think you are whistling in the wind.
First of all the OECD data does not prove that tax cuts are linked to growth. Statistically it says this case is not proven. It does not say tax increases increase growth, I agree – but not the reverse. So that’s one of your arguments down.
Second, the increase in US tax revenues you refer to has nothing to do wih tax cust but everything to do with the tax amnesty allowing US corproations to repatriate profits at low tax rates for a year – so please don’t abuse the evidence.
Third – the Treasury is more dynamic than you’re giving them credit for – so I don’t buy your argument.
Fourth, self interest is the absolute core of the politics the TPA, Adam Smith Institute, IEA and other such UK neo-con bodies espouse. In fact, not only is it the key assumption, it is assumed irrational to consider anyone else (which is based on the wholly false interpretation of Adam Smith’s ‘invisible hand’ that the Right likes to use – in itself a crazy logic when Smith used the phrase just once in a book well over 400 pages long and had no intention that it should be the key feature of the work). So of course I accuse the TPA of complete self interest. To say anything else would be quite straightforwardly wrong.
That and the fact that there’s no evidence to suppot their claim, but they pursue it anyway saying they must put their own interest before that of all others – as I convincingly prove to be the acse in my work on flat tax for the ACCA.
So, please debate – but can you get your facts right first?
OK Richard- I’ll reply on my own blog