November 01, 2006

Why would politicians slash taxes?

They'd have to cut public spending, which would probably make them unpopular.

Even if we had conditions where some politicians wanted less of our money to play with, there is no party proposing this in any coherent way, or campaigning for it.

Nor is there any early prospect of that at all.

Which two distinguished economists must have known when they wrote to the Financial Times following up Martin Wolf's recent article there about Britain's move to a high tax economy.

As the TPA summarizes their initial argument -

The economists point out that Britain’s public spending is now well above the OECD average, that public spending has risen by 8 percentage points of GDP since 2000, and that Britain’s tax burden will have to rise unless spending is brought down.

They also argue that countries with lower public spending than the UK have decent societies, good infrastructure and quality public services

And the two economists go on -

The low public spending countries are not just the usual Anglo-Saxon jungle habitats. Japan and Switzerland have civilised and humane societies; healthcare is good and the infrastructure works. Why does Britain need to spend more than 45 per cent of GDP? Is the country getting value for money? These are a couple of the questions our political leaders should debate. Instead politicians outdo each other by ratcheting up the spending commitments and, inevitably, the overall tax burden.

Therefore, they say -

We propose that there be a debate about the pros and cons of what we call "the 33 per cent solution". This is the proposition that all legitimate functions of the state in an advanced industrial society can be financed with taxes not exceeding 33 per cent of GDP. What these legitimate functions of the state are is, of course, what the debate should be about.

Whether the 33 per cent solution is infeasible or too generous depends crucially on where one draws the boundaries of the state. For us, the essential functions of the state consist not just of law and order and defence but also its role in funding essential public goods and services (including public health education and the environment).

Beyond this, of course, the state may have legitimate redistributional objectives that it pursues through taxes and transfers. But let a real debate start, please!

The TPA comments that taxpayers could do with politicians genuinely having a debate about whether the state’s functions can be financed with a tax burden of 33 per cent of GDP.

This is around 9 percentage points lower than the current level (using OECD figures), in other words, a reduction of just over a fifth. Given that the government currently raises slightly more than £500 billion, such a reduction would save taxpayers around £100 billion – almost enough to completely abolish income tax for anyone earning below £40,000 a year.

It’s helpful that both the European Central Bank and the Taxpayers’ Alliance have found that taxpayers would save around £80 billion a year without any reduction in services if public sector efficiency was improved and waste was reduced. That would get taxes down almost to the level that Buiter and Sibert suggest.

But the TPA and the economists know that the leaderships of the established parties are resolutely against any such debate because it will serve the interests of none of them.

So what are these - hardly unworldly - economists really calling for?

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