The Laffer curve (recognized many centuries before Laffer popularized it) argues that there is no tax collected when rates are nil, obviously, and none when tax is 100% so the optimum rate must be on a curve somewhere in between the two. It follows that lowering tax rates can increase the total take. Evidence cited includes the Lawson budgets of the late 80s. Increased wage packets improve confidence; higher spend stimulates the economy leading to short-term growth; greater demand boosts revenues encouraging increased wages thus mitigating reduced income tax rates, and compensated by higher VAT on increased spend and corporation tax. For an economist I’d make a svelte ballet-dancer, but you can see where I’m coming from. One suspects that the real reason Laffer hasn’t been explored isn’t economic but political.
It isn’t fanciful to compare Britain emerging from the tribulations of the post-war era and the socio-economic problems of the seventies with the triple fronts of the tail-end of the banking crisis, the seismic rupture of Brexit (wherever you stand) and Covid-19. Throw in the destabilizing effects of Putin’s war in Ukraine and the inexorable rise in inflation and we’ll be needing a strong government able to take leftfield decisions without fear of the electorate.
In the eighties it led to bipolar boom and bust which Gordon Brown thought he’d cured. This government’s experimentation has been cautiously paternalist: furloughs; self-employed subsidy; CBILs; industry-specific initiatives particularly the restaurant trade. Our clients are representative. None have run the gauntlet of asking staff to work then falling foul of the emerging furlough enquiries.
The loans are in grey territory; beware a chancellor bearing gifts. They look like unreturnable grants with no personal guarantees under £250,000, money credited within hours of the application, unprecedented, deregulated Bank of England business bailouts. Shades of the film schemes. Free money, then the treasury counts the cost and the trap springs. Ruining lives. Waiting for a string of suicides to lift HMRC’s and the banks’ knees from entrepreneurs’ necks.
When the CBILS deadline was extended to 30 November 2020, professional advisers worried that applicants were pressurized into climbing aboard a parting gravy-train. This must have included businesses which had been exposed to Covid-19 disruption that bit longer, and whose owners had delayed borrowing loan perhaps worried about their business’ ability to repay, surely including businesses that were insolvent grasping for last-minute help. Are they insolvent purely because of Covid-19, planning a return to solvency promptly post-vaccine? Were they then unstuck by the triple blow of Putin’s war, rising inflation and a destabilized UK government? While I’d be very wary about kicking the can down the road, it’s only human nature. How can the full force of the law be brought down on entrepreneurs who accepted loans fighting for their breathe? We’ve our first letter from the Official Receiver considering disqualification in similar circumstances. What was the bloody client supposed to do? How can the tax funded officials in their secure jobs sleep at night? Hell hath no fury like a government reversing largesse to balance its books post crisis.
Speaking of insolvency, the government needs money, but does that mean raising tax? The problem is that taxation has become the acceptable face of redistribution of wealth, clouding a complicated equation. This chancellor may use reduced taxation to stimulate the economy while saving money on spiralling welfare by keeping people in jobs and still raising his take to fund past subsidies. In the 80s the increased discretionary spend and free trade contributed to the inflationary effect of imported luxury goods. Brexit’s protectionism might manage that risk.
Batten down, strap yourself in for the low taxation afterburn, and welcome the ultimate post-EU libertarian deregulated welfare state.