Naively, I missed a sixth potential function of Osborne’s new Office for Budget Regulation – to protect David Cameron against Tories who want tax cuts. Here’s the theory, which I heard last night from more than a few people. The OBR is programmed with a static rather than dynamic model of tax collection – ie, it judges a reduction in a marginal tax rate as a net loss to the Exchequer, ignoring the extra industry it would unleash. So it says “no tax cuts, we must pay off debt” and strengthens Cameron’s hand against his own party.
If this sounds daft, remember that the Tory party is still in therapy over the issue of tax cuts. I don’t include Osborne in this, but there still plenty of artists formerly known as Portillistas who are still unable to debate the issue logically. They regard all low-tax Tories as the Mad Ones – a cave-dwelling cult led by Redwood and Tebbit, who think tax cuts are a golden bullet and must be destroyed if the Tory party is to prosper. So they start to hyperventilate when hearing the word “Laffer” or “spending cuts”.
For what it’s worth, I believe Osborne sees the OBR as a political tool to amplify his core message – that Brown is a profligate bounder. While this OBR has the potential to act as a bulwark against the tax cuts, I don’t think Osborne would be so cowardly as to create a Quango just so he can hide behind it once in government. It’s not his style.
I’m chairing a Taxpayers’ Alliance debate on Tuesday evening about what a Tory Treasury could look like, and one absolute priority I see is to return to dynamic tax modelling, so HM Treasury factors in non-compliance and entrepreneurial stifling when it considers money to be “raised” by higher marginal rates. Only then do you get a realistic assessment of the harm high taxes do, and the potential of actually confiscating less of people’s money.
Judging my the response to my last blog on dynamic tax modelling, this is an issue which even splits CoffeeHousers. I am firmly amongst those who believe we’re on the wrong side of the Laffer curve and that if Cameron wants to repay this debt quickly he can both lower tax rates and increase revenue.
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