Can the road to Kansas deliver economic results?

July 25, 2014 3:48 PM

The Daily Telegraph’s Jeremy Warner says that Britain should follow Kansas and dramatically reduce taxes, citing the economic benefits that the state is starting to enjoy. Mr Warner highlights evidence that:

both private-sector growth and job creation have improved sharply relative to national averages. Rates of private-sector job growth are virtually back up to the national average, having significantly lagged behind them in the past. Kansas is also experiencing record levels of company registrations. Many of these will eventually lead to start-ups and extra jobs.

Experience, in other words, is already beginning to mirror what other low-tax states achieve. If we take the 15-year period between 1998 and 2013, the 50-state average for private-sector job creation was 8 per cent. Yet for those states such as Texas, Florida and Nevada that don’t impose income taxes at all, the rate of growth was 18.3 per cent, against 5.6 per cent for those that do. Tax competition, it seems, works in practice just as you might expect it to in theory.

Although the coalition has implemented some welcome tax cuts (especially Corporation Tax and raising the personal allowance), there have also been deep failures. A serious cost of living crisis and many other problems show that the current fiscal plan of increasing the tax burden and reducing spending is not enough. Mr Warner rightly asserts that reducing taxes can allow more manoeuvre for wealth creation in the economy, sharpening incentives and encouraging more investment, growth and employment.

News today that the economy is at its biggest ever level is welcome, but it isn’t quite cause to cheer the Chancellor that it might at first seem. The GDP figure misleads as when expressed per head it is still lower, signalling that we are all still considerably less well off than we were before the recession as Jeremy mentions “GDP per head has still got some way to go before it attains past levels.

On top of this, the Government also “managed to borrow more so far this year than last.” This means that despite the healthy GDP figures, the Government is still struggling to pay its way and future taxpayers will be left to foot the bill.

So George Osborne should not feel too satisfied with the latest figures, especially falling real terms incomes mean that whilst the economy may officially be better, the people are poorer and the government are trying to squeeze more money out of the public.

The idea that tax cuts are necessary is by no means a new one, of course. Our 2020 Tax Commission highlighted a much simpler system that will benefit the economy where spending and tax are both reduced to 33 per cent of GDP, down from 42.5 per cent for spending and 37.7 per cent for taxes this year. Maybe it is now time to follow the path set by Kansas which displays encouraging signs on private-sector growth and job creation. We need to look at dramatically reducing taxes and getting the government and citizens back on a sound financial footing to ensure prosperity for all.

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