Public spending cuts would lead to higher growth
The authors praise the recent report of the Conservative Party Tax Reform Commission, led by former Cabinet Minister Lord Forsyth, as ‘a serious and economically literate analysis’ and ‘a solid and impressive piece of work’. However, the policies recommended by the report have largely been rejected by the Conservative Party’s ‘big-government appeasers’.
David Cameron’s refusal to take account of the substantial dynamic benefits from tax cuts – rising revenues as a result of higher growth, increased labour supply, reduced emigration and less tax evasion – is described as absurd by Professor Patrick Minford. Minford welcomes the Commission’s arguments for taking account of the dynamic benefits of tax cuts but suggests that the ground was cut from under the Commission’s feet by the party hierarchy before it could report.
The Conservatives have also failed to address the problem of ‘churning’. Professor Tim Congdon points out that about 8% of national income is taken in taxes from individuals and then returned to the same people through public spending on welfare benefits. There is no redistribution involved. In an ideal world ‘churning’ should not exist, since it unnecessarily increases the economic damage caused by taxation.
According to Congdon, David Cameron’s rejection of the Commission’s modest proposal for a £21 billion tax reduction reinforces the message that today’s Conservatives have lost the intellectual momentum given them by Lady Thatcher in the 1980s.
*Economic Affairs, Vol 27, No. 2, Institute of Economic Affairs, £7.50.
**Patrick Minford, Professor of Applied Economics at Cardiff Business School; Professor Tim Congdon, IEA Economics Fellow; Professor David B. Smith and Dr Eugen Mihaita, University of Derby.