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Conservativehomeeditorial_7The think tank Reform (founded to promote "radical public sector and economic reform") yesterday published an excellent briefing on tax.

In its latest Bulletin Reform took issue with George Osborne’s suggestion that stability and lower taxation were, in some way, at odds:

"In fact the key determinant of stability is monetary policy.  The last episode of major economic instability, in the early 1990s, was caused by the manipulation of monetary policy to keep sterling within the Exchange Rate Mechanism.  The solution was the steps towards Bank of England independence begun in 1993 and completed in 1997."

PickpocketsIn line with classical economic thinking Reform argues that monetary policy should be used to provide a stable macroeconomic background whilst tax and other supply-side policies should be used to restore UK productivity and international competitiveness.  Reductions in tax benefit productivity in two main ways, Reform argues:

  1. The incentive effect: They reduce disincentive effects to save, invest, innovate and work longer hours.
  2. The resource effect: Resources are moved from the public sector – where productivity performance is weak – and into the private sector – where productivity is rising.

Reform accepts George Osborne’s argument that economic policy must be much bigger than tax policy but it also insists that tax must underpin the kind of "growthist" agenda that has spurred the US economy in recent years.  It notes that the tax competitiveness enjoyed by Britain at the end of the Tory years is being eroded:

"In 2000, there were only nine OECD countries with lower corporate
tax rates than Britain.  By 2005, the number had increased to 13.
Similarly, in 2000, there were only two OECD countries with a lower top
rate of income tax than the UK.  By 2004 there were seven."

The Business recently showed how UK levels were rising above those in Germany.

One_london_1The One London Party – formed out of the UKIP-to-Veritas train wreck – is trying to position itself as the champion of London’s taxpayers.  London Assembly member Damian Hockney – a former Eurovision song contest winner – has attacked the Tory idea that tax cuts and stability are somewhere in conflict:

"We were horrified when the Tory leadership came up with this economically illiterate nonsense.  They appear to neither understand wealth creation nor the world in which we live… The One London Party believes that Britain should be moving in the opposite direction: towards a single rate of tax of 22% that will be paid by the better off half of the working population. Flatter tax will release people at the lower end of the economic scale from the tax/welfare trap; it will reduce evasion at the upper end, create wealth and jobs and reduce administrative costs.

We would raise the tax threshold for a single person to £12,000 a year and make personal tax allowances fully transferable to spouse or partner.  Unlike the Tories, who are turning into a kind of New Labour Lite, we believe that people should be in charge of their income, that government waste should be eliminated, and that more should be taken out of the government’s hands and returned to the control of the people.

Our tax policy is in line with our view on small government and individual freedom. We are first and foremost a party for London, one of the most successful cities in the world. It would be even more successful with lower taxation and lighter regulation governing the lives of people who live and work here. It is not impossible to make London a separate tax zone with a flat tax being introduced along the lines suggested above."

UKIP are also reported to be trying to take advantage of the Tories’ consensual approach to tax.

John Redwood is now head of David Cameron’s competitiveness policy group.  Mr Redwood, who once said that the Conservative Party was a party of tax cuts or it was nothing, must find ways of persuading the top Tory team that its cautious approach to tax is bad politics and bad economics.

41 comments for: Reform offers George Osborne an economics lesson

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