Leading article

George Osborne has seen the light on tax cuts. Now he needs to implement some more

Here's what the Chancellor could do for the lowest-paid — a dramatic tax cut worth at least one month's extra salary a year

7 December 2013

9:00 AM

7 December 2013

9:00 AM

George Osborne has not been a complete disappointment as Chancellor. He has, it is depressing to note, ended up giving Britain a leisurely ten years to get back in the black while the national debt soars. He has a worrying enthusiasm for finding new ways of hawking underpriced debt to business and homebuyers. But the British recovery is now gathering pace, Britain has more jobs than ever, and if you trawl the small print of his Budget statements, you can find a number of things that Osborne is getting right.

He has stuck to his plan to shed hundreds of thousands of public sector jobs. And what Ed Balls dismissed as a right-wing fantasy has come true: two private sector jobs have been created for every public sector job lost. Osborne has also cut the top rate of income tax from 50 per cent to 45 per cent; and the share of tax collected from the richest has jumped to a new high: the best-paid 1 per cent now contribute 30 per cent of all income tax collected.

Just as Mr Osborne said, the 50p rate raised no money. His tax cut squeezes the rich far more effectively. His single most radical act has been to reduce corporation tax from 28 per cent to an eventual target of 20 per cent — the lowest in the G20. He is right to argue that since Britain is in a global race, countries must compete with each other for businesses (and people). When he first proposed this measure, Treasury officials assumed it would cost several billion pounds: as an institution, it had been programmed by Labour to assume that a tax cut meant less money for ever. It was blind to the chief insight of conservatism: that lowering taxes encourages companies to take more risks and make more money.

Slowly, Mr Osborne is reprogramming the Brownite machine that he inherited. He has made the Treasury produce a study on corporation tax, to be published alongside his Autumn Statement this week. It finds that the corporation tax cuts have indeed stimulated the economy to a striking degree. The Treasury’s conclusion is that it has clawed back two thirds of the cost of the tax cut. This is probably an underestimate. Lowering taxes, it seems, is not so expensive after all.

Encouragingly, Osborne is introducing what the Treasury refers to as a ‘state of the art’ way of calculating the effect of tax rises and cuts, a system that takes expected change in behaviour into account. Done properly, this should transform the way the British government views taxation.

The idea of lower taxes bringing more money existed centuries before Arthur Laffer drew his famous curve on a cocktail napkin. This week marks the 51st anniversary of John F. Kennedy’s speech to the Economics Club of New York, where he explained the ‘paradoxical truth’ that ‘the soundest way to raise the revenues in the long run is to cut the rates now’. He did, and America recovered.

So now that this truth is beginning to dawn on the Treasury, what next? The most obvious move will be to drop the top rate of tax back to where it was under Labour: to 40 per cent. The extra tax revenue that such a cut would yield should then be used to relieve the fiscal burden on the very poorest. Until now, Mr Osborne has been ensnared in a Liberal Democrat trap, saying he has helped the lowest-paid by lifting 2.4 million people out of income tax altogether.

This sounds good in speeches, but it amounts to a paltry sum: less than £2 a week, according to the think-tank Policy Exchange. The Conservatives should pursue a more meaningful way of helping those on the lowest salaries: a dramatic tax cut worth at least one month’s extra salary a year. When this was tried in Sweden, it worked so well that the tax cut almost paid for itself, through more people moving from welfare to work, and spending more as a result. The same could work for the lowest-paid in Britain. It would be a gamble — but it would bring help to where it is most urgently needed. And it would clearly align the Tories with their target voters.

The Chancellor is coming to realise that tax cuts are not a treat to be doled out after we have eaten our austerity gruel. As JFK put it, ‘an economy hampered by restrictive tax rates will never produce enough revenue to balance our budget, just as it will never produce enough jobs or enough profits’. Things are going well for Mr Osborne: the recovery has finally started to take hold. The surest way of speeding it along is to keep cutting taxes.

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  • D M

    Or just get rid of tax altogether, and require people to contribute a certain number of hours a week, either of their wage, or in actual work; even the unemployed can therefore give it. Create a tax on money leaving the country. d