Flawed legacy of cutting the top rate of tax

THERE is a fallacy familiar to students of logic which Holmes would have described to Watson as ‘elementary’. It is the one known as Post Hoc Ergo Propter Hoc – ‘ after this ( or that) therefore on account of this ( or that)’ – i. e. because one event follows another it is caused by the first event.

This is one of the most common mistakes made in everyday life. It is therefore with due caution that one notes the way the government’s poll ratings dropped so dramatically after George osborne’s Budget.

The sudden surge in the government’s unpopularity may not have been caused by the Budget; but it looks suspiciously likely that it was. And it was not just the so-called ‘Granny Tax’.

It was also the perceived unfairness of announcing a proposed reduction in the top rate of tax at a time when the government is quite deliberately inflicting so much hardship on the general population.

It is not uninteresting that the negative reaction to the Budget has been followed by the first reports of trouble brewing between the Neighbours at Numbers 10 and 11 Downing Street.

It was Nigel lawson who observed that the most important relationship in a (peacetime) Cabinet is that between the Prime Minister and Chancellor.

Things nearly went badly wrong during the IMF crisis of 1976, when Chancellor Denis Healey had to turn back at the airport.

For a time there was tension between Healey and Prime Minister Jim Callaghan. In the end they got their act together, and the government did not fall over the issue.

A more recent example was the guerrilla warfare between the Blair camp and the Brown camp after 1997. But for students of the Conservative Party the really fatal fallout was that between Margaret Thatcher and Chancellor lawson in 1988-89.

It seems pretty obvious that at least one of the sources of discontent between Cameron and osborne is the way that the Chancellor went ahead with the plan to reduce the top rate when Cameron had expressed doubts.

There is a strong suspicion that the Chancellor is being economical with the truth when it comes to the revenue that will be lost when the top rate comes down – revenue that could be used for schools, hospitals, roads – you name it!

Mr osborne has insisted on some pretty dodgy calculations about ‘ behavioural effects’ to justify his argument that the top rate not only raises very little revenue, but that its abolition would actually increase the tax take.

The story goes back to the early 1980s, and a US economist called Arthur laffer who affected to demonstrate, on the back of a paper napkin in a Washington DC restaurant, that lowering tax rates increased the tax take – his on-the- spot diagram being known as the ‘laffer Curve’.

This was widely discredited. Under Reagan the deficit rose and rose and, surprise surprise, was swollen when taxes were cut. In his 1988 Budget Nigel lawson pursued the same line, when he reduced the top rate from 60p to 40p.

But while the cheeky chappie maintained that this would increase revenue, his more cautious Treasury officials pointed out that there would be a loss of some £6bn.

Subsequent boosts to revenue owed more to the effects of the lawson Boom than to mysterious ‘behavioural’ effects’

HOWEVER, let us give credit where credit is due. I myself have an oldfashioned belief that a civilised nation needs reasonably high levels of taxation to finance a decent level of public services.

But Nigel lawson changed the entire debate with his 1988 Budget, when the top rate was cut from 60p to 40p. We are still living with the consequences.

Meanwhile, it has to be conceded that one way in which osborne may prove that the top rate does not yield very much is by being so inept in announcing his intentions that the lawyers and accountants are having a field day with their tax avoidance schemes.