The politics of tax

What should the Tories do about tax? The always interesting Allister Heath proposes in The Spectator that they should take a lesson from Ireland and lower corporation tax significantly.

We can certainly agree that

The plans outlined by George Osborne, the shadow chancellor, to cut corporation tax to 25 per cent, remain singularly unambitious and are still based on plans to hike green taxes, a policy which now looks as dated as kipper ties.

Between 1994 and 2003, he writes, Ireland cut its corporation tax from 40% to the current 12.5%.

In 1993, income per capita was 28 per cent higher in Britain than in Ireland. The Irish economy then took off, with average real-terms economic growth between 1994 and 2006 of 7.4 per cent. In contrast, Britain managed just 2.9 per cent real-terms growth in the same period. Today the Irish enjoy income per capita 20 per cent higher than in Britain.

Recent research has modelled the impact of pre-announced, phased corporation tax cuts of 2 per cent each year until the Irish level of 12.5 per cent was reached.

Their findings were striking. By 2021, by which time we would be in a third Tory term of office, GDP would be 8.7 per cent higher than it would otherwise be; investment 60.9 per cent higher; employment 8.7 per cent higher; and wages 13.5 per cent higher.

Although this plan would cost £3.8 billion initially in reduced revenues (in fact barely more than Brown’s partial U-turn on the abolition of the 10p income tax rate) by 2021, revenue would be £28.7 billion higher. Within eight years, revenue would be higher than without corporation tax cuts: in other words, tax cuts would actually pay for themselves.

But it wouldn't be a populist manifesto commitment, and Labour would certainly argue it showed the Conservatives were on the side of big business. And we know the French favour 'harmonisation' of corporate taxes in the EU (which they're welcome to do in the Eurozone of course).

But if any of this is politically possible, will it be economically possible? In the same issue Fraser Nelson argues that if Brown is sure he is going to lose the next election he may as well spend profligately in pursuit of his policy goals and leave the next Conservative government to pick up the bill.