The flat-tax revolution

Saturday, 9th July 2005

George Osborne on the lessons we can learn from Eastern Europe

The second flat-tax lesson is that lower taxes help encourage investment and enterprise. As Nigel Lawson proved in the 1980s, and the Estonians are demonstrating today, reductions in tax rates do not necessarily lead to corresponding reductions in tax revenues. Lower taxes help create an environment in which business and wealth-creation flourish, generating additional revenues for the government. It is a win-win situation. Of course, the Treasury cannot bank on these additional revenues and must proceed in a way that does not jeopardise the public finances. But equally we should bear in mind that there is a major risk to our economy if we do not find ways to reduce taxes. For it is difficult to see how we are going to compete with flat-tax regimes and other low-tax economies unless we do. In 2000, 20 out of the 30 major countries of the OECD had a higher corporation tax rate than Britain. Today, just five years later, only 10 do. No wonder we have fallen in the world competitiveness league table. No wonder foreign direct investment into the UK has almost halved since 1997. Creating a lower tax environment is a crucial part of meeting the competitive challenge that globalisation is bringing.

Britain was once the home of exciting new economic ideas. In the 1980s our free-market revolution inspired a generation of young people in Central and Eastern Europe fighting for their economic and political freedom. Today, thanks to their courage, they enjoy both. Now those young people are running their countries, and it is their dynamic flat taxes that should be an inspiration to us.