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Tuesday 22 May 2012

Reality-Based Fiscal Conservatism

Bully for George Osborne. His interview with James and Fraser contains heaps of good sense. Most especially when he defends his attitude towards tax:

Asked if he regards Britain as an over-taxed country, he hesitates: “That’s a good question. I would like to reduce taxes - so, in that sense, it would be good if we could bring taxes down. But I’ve always believed the only way to do that is to have sound public finances. I am a fiscal Conservative, I’m not a Reaganite deficit-funded tax cutter. I am actually in that sense more the model that Margaret Thatcher and Nigel Lawson pursued. That means sorting out the public finances - and if there is a surplus, then use that to reduce taxes. That’s what he did in the late 80s.”

But by the Treasury’s analysis, there will not be a surplus in this parliament. Does that mean no tax cuts either? “Look, as I say, once we can bring some stability to the public finances, we can look at reducing the tax burden on people. But it is a complete mirage to cut taxes one year, then have to borrow the money and put up the taxes later to have to pay for that borrowing. David Cameron and I for many, many years had this argument with the Conservative party.

“I remember the party conference in 2006 making precisely this point: that sound money was the route to lower taxes and this was before the crash.  I had the argument during the recession when I opposed the VAT reduction because I felt it was being paid for by higher borrowing and the real concern facing the country at the time was ever higher borrowing and deficit levels that were bringing into doubt the credibility of the country’s economic policy. So I am absolutely a proper fiscal Conservative and I will take on the Fraser Nelson’s of this world!”

[C]ertainly, the Chancellor is in favour (in the abstract) of lower taxation but what he does not support are what he calls “Reaganite” fiscal measures. He will not, he says, bring in “unfunded tax cuts” which would only increase the deficit. Every tax cut, in other words, must be matched by an equivalent spending cut.

Does Mr Osborne really not accept that lowering taxes actually encourages economic growth thus increasing revenue, and therefore increasing the amount of money which government has to spend – which, in turn, means that each and every tax cut need not be matched by an equivalent reduction in public spending? Does he not appreciate that by cutting payroll taxes (such as National Insurance contributions) you can help to reduce unemployment, thereby increasing the number of people who are paying tax to the Treasury? (He seemed to understand this when he was in Opposition arguing against the Brown government’s proposed increased in National Insurance.)

Yes, some tax cuts pay for themselves. No, not all tax cuts do so. Osborne is a little harsh on Reagan but the worshippers at the Reagan Cult are even more mistaken. Yes, Reagan slashed taxes in 1981. Thereafter he raised taxes at least 11 times, clawing back nearly half the revenue foregone by the 1981 cuts.

And then George HW Bush, the most under-rated President of the last 60 years, had the temerity to raise taxes. And cut spending. Fiscal responsibility demanded he break his irresponsible "Read my lips" promise so Bush, in stark contrast to his son, did the responsible thing. As Bruce Bartlett explains:

Although Republican negotiators were willing to discuss taxes, Democrats were wary of a trap. They feared being hung out to dry unless Bush himself made a public commitment to put taxes on the table. He did so on June 26, 1990, saying, “It is clear to me that both the size of the deficit problem and the need for a package that can be enacted require all of the following: entitlement and mandatory program reform; tax revenue increases; growth incentives; discretionary spending reductions; orderly reductions in defense expenditures; and budget process reform—to assure that any bipartisan agreement is enforceable and that the deficit problem is brought under responsible control."

[...]The final deal cut spending by $324 billion over five years and raised revenues by $159 billion. The most politically toxic part of the deal, as far as congressional Republicans were concerned, involved an increase in the top statutory income tax rate to 31 percent from 28 percent, which had been established by the Tax Reform Act of 1986.

[...] In the House of Representatives, 163 Republicans voted against it and only 10 supported it. In the Senate, only half of Republicans voted for the deal. More significantly, Bush’s abandonment of his no-new-taxes pledge dogged him all through the 1992 election campaign and contributed heavily to his defeat by Bill Clinton. Ironically, Ross Perot also contributed to his defeat by arguing that Bush had not done nearly enough to reduce the deficit.

Budget experts now agree that the Budget Enforcement Act of 1990, which was strengthened in 1993 by another budget deal that was opposed by all Republicans, deserves much of the credit for the subsequent improvement in the deficit, which shrank from 4.7 percent of GDP in 1992 to virtual balance in 1997 and gave us budget surpluses from 1998 to 2001. Economist Robert Reischauer, director of the Congressional Budget Office when the 1990 budget deal was enacted, told me it was “the foundation upon which the surpluses of the 1998 to 2001 period were built.”

But in 2002, Republicans abandoned the budget rules put in place in 1990 so that they could cut taxes without constraint. The result was a continuous string of budget deficits throughout the George W. Bush years.

Quite. It's a matter of balance. As a general rule it would be best if taxes could be lower; that doesn't mean every tax cut is a Good Thing far less that every tax cut will more than pay for itself. So, in the end you have a choice: which Bush are you with? The Elder or the Younger? The answer to that question is, and always will be, revealing.

Cutting taxes is good - and important! - but it does matter how and when you cut them. Also, which taxes you cut.(I'd like much flatter taxes and greatly simplified code too but am not holding out too much hope for that.)

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