Along with the rest of the Adam Smith Institute I have been advocating for years that the Treasury should use dynamic modelling of the economy. Put simply, this means factoring in the behavioural changes that policy innovations will induce. The previous method, typified by Gordon Brown, was to assume that if a 10% tax raised £100m, then putting it up to 15% would raise an extra £50m. It took no account of the effect the tax increase had on people’s behaviour. Some taxes lead people to consume less by putting up prices. Some, like those on alcohol, might encourage people to smuggle more. Absurdly, the taxes on smoking, allegedly designed to discourage it, calculated their likely revenue yield on the assumption that the same number of cigarettes would be bought.
In Wednesday’s Economic Statement there appeared the Treasury’s dynamic model on corporation tax. It factors in the likely growth that tax cuts in this area will lead to, and therefore reduces the likely loss of revenue that tax cuts will entail. Hurrah! It’s a small victory but an important one. Now sweep it through the rest of the economy, applying it to all taxes, regulations, incentives and allowances. Suddenly we’ll find ourselves in a world where tax cuts stimulate economic activity and bring in more revenue, where lowering tax rates on the rich results in them paying a higher share of the total, and where lowering the burden of regulation promotes competition and drives down prices. It’s called the real world, and we’ve occasionally visited it before. Now it’s time to do so again.
Filed under: Updates |
Madsen Pirie 
I was self employed for 18 years and certainly monitored my customer trends and fortunes. Alistair Darling had the right idea in 2009 when he reduced VAT to 17.5% which kicked the economy out of recession. We nearly all see looming austerity as a marker to reduce expenditure and hang on to our money, the vicious circle starts and recession is the end product. Businesses should see the potential reduction in sales/service needs and adjust to the market before they get into real trouble. Governments who instigate this situation should also look beyond their horizon unless they do not consider or care what happens at the next General Election.