More tax or higher tax rates? by John Redwood MP

In opposition the Conservatives were sympathetic to the idea that the Treasury needs a more dynamic model to forecast the consquences of changes in tax rates. Many in the debate over CGT rates seem to still believe that higher rates yield more revenue, when past experience suggests higher rates may reduce the revenue.Sales of properties and shares can be brought forward or delayed, depending on the tax rates.

There is a more general point at stake here. Sensible commentators agree that to remove the huge deficit we need to collect more tax as well as cut spending. Under the old Labour sketchy plans to halve the deficit in four years, they said 80% would come from spending cuts and 20% from tax rises. However, that was only part of the story. They also said a lot of the deficit reduction would be down to faster economic growth – another way of saying they would collect more in tax as well as some cyclical reductions in public spending. Under Labour plans the total amount of the deficit reduction to be achieved by extra tax was well above 20%.

Between 1979 and 1990 there were substantial cuts in Income Tax rates, and the abolition of several smaller taxes. Over this time period the total tax collected went up by by 170%. Under the last Labour government, following a self described policy of no Income tax rises for much of its tenure, revenue went up by 125%. The rate of increase in tax revenue was faster under the more overtly tax cutting Conservative government, even after allowing for inflation.

Government has a choice – higher tax rates or faster growth of revenue. It should be obvious which we need now.

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