Sunday, June 12, 2005

A No-Brainer but Here it is Spelt Out: The Right Tax Cuts Create Growth

from The Adam Smith Blog, 12th June

And just in case this gets lost in the text: Tax revenues in the US boomed after the appropriate tax cuts of 2003.

While Gordon Brown was busily raising taxes here in the UK, the Bush administration in the US cut them in both 2001 and 2003.

Economic growth after the 2003 cut has been 4.4%; after the 2001 cut it was just 1.9%. Net job creation after the 2003 cut is 150,000 a month; after the 2001 cut, jobs declined slightly. Tax revenues boomed 6% after the 2003 cut; compared to falling revenues after the 2001 cut.

Of course, tax cuts are just one factor in the US economy. But Mitchell points out they can only stimulate productive action if they lower its price. The 2001 round focused on rebates, tax credits and lower thresholds for needy families, with a negligible impact on enterprise, and grudging cuts to income tax and death tax, which did very little.

By contrast the 2003 round included a cut in tax on new business investment, faster income tax cuts, and a reduction in the double-taxation of dividends and capital gains - all of which had significant pro-growth impact, says Mitchell. The right tax cuts mean more growth, producing a wider tax base that allows tax rates to be kept at a lower level: a virtuous spiral.

It is all in great contrast to Gordon Brown's policy. Yes, there have been some reductions in corporate taxes. But income taxes have risen (more people being dragged into the 40% bracket, rises in national insurance), and tax credits and other tweaks have made the system unfathomably complex.

The fact is that Brits work far longer for the tax-collectors (until May 31 this year) than Americans. And a lot of them are starting to think, quite understandably, 'why bother?'



Anonymous said...

It's hard to imagine that the link tax cuts = growth is as straightforward as all that. Lots of other factors that influence the state of the economy would need, I imagine, to be weighed up and taken into consideration.

Carlotta said...

You're right of course, but all other things being equal, appropriate tax cuts seem historically to be a very sensible policy.