Cut, Balance and Grow

October 31, 2011 10:30 AM

It’s as simple as that according to Rick Perry, a contender for the Republican Presidential nomination. He wrote in the Wall Street Journal earlier this week stating his plan for balancing the budget, growing the economy and creating jobs.

He advocates a “simple, 20 per cent flat tax” under which the first $12,500 (£7,800) earned would be tax free; any income over the $12,500 limit would be taxed at a rate of 20 per cent, various existing exemptions would continue for families earning less than $500,000 (£312,200).

Corporation tax will be reduced to 20 per cent from up to 35 per cent with a temporary reduction to just 5.25 per cent in order to encourage companies to bring back assets to the US (which he values at $1.4 trillion, or £875 billion). In addition the American equivalent of inheritance tax, tax of Social Security benefits and on long-term capital gains would be abolished.

These tax cuts will be funded by eliminating the “mind-boggling complexity” of the current tax system and phasing out “corporate loop-holes and special interest tax-breaks” in addition to huge reductions in Federal spending by repealing recent legislation such as ObamaCare. The budget would be balanced by a freeze on civilian recruitment until the budget is balanced, entitlement reforms and a balanced budget amendment to the Constitution.

Whilst Osborne intends to balance the budget earlier than Perry, he has been criticised for lacking a plan for growth and has ruled out tax cuts in the short term – particularly the 50p rate.

Growth will remain elusive for us since huge amounts of damaging legislation (such as the working-time directive and the temporary agency workers directive) come from Brussels and are not likely to be repealed any time soon. All this EU legislation adds to burdensome compliance costs for business and act as a drag on job creation.

Arguments about tax reform in the UK have been stifled and many just accept the tax system as it is. It's a well-worn way of phrasing it but if you sat down with a sheet of paper to design a tax system from scratch, it would be near impossible to arrive at the one we have now.

In lieu of significant reform, it would be good to see lower rates - or even discuss them. Past evidence suggests that reducing marginal tax rates leads to higher tax receipts (the Laffer Curve), as people see the benefits of working more and have less incentive to employ accountants to find complex ways to avoid tax liabilities.

Without endorsing Rick Perry’s specific proposals as the way forward for the UK, we do need to have a real debate about what our tax system should look like in the future. In the US this debate is far more mainstream and it's a shame that it's seen as boring in the UK. We need an agenda for growth, and significant tax reform could be the missing ingredient the Government is missing.It’s as simple as that according to Rick Perry, a contender for the Republican Presidential nomination. He wrote in the Wall Street Journal earlier this week stating his plan for balancing the budget, growing the economy and creating jobs.

He advocates a “simple, 20 per cent flat tax” under which the first $12,500 (£7,800) earned would be tax free; any income over the $12,500 limit would be taxed at a rate of 20 per cent, various existing exemptions would continue for families earning less than $500,000 (£312,200).

Corporation tax will be reduced to 20 per cent from up to 35 per cent with a temporary reduction to just 5.25 per cent in order to encourage companies to bring back assets to the US (which he values at $1.4 trillion, or £875 billion). In addition the American equivalent of inheritance tax, tax of Social Security benefits and on long-term capital gains would be abolished.

These tax cuts will be funded by eliminating the “mind-boggling complexity” of the current tax system and phasing out “corporate loop-holes and special interest tax-breaks” in addition to huge reductions in Federal spending by repealing recent legislation such as ObamaCare. The budget would be balanced by a freeze on civilian recruitment until the budget is balanced, entitlement reforms and a balanced budget amendment to the Constitution.

Whilst Osborne intends to balance the budget earlier than Perry, he has been criticised for lacking a plan for growth and has ruled out tax cuts in the short term – particularly the 50p rate.

Growth will remain elusive for us since huge amounts of damaging legislation (such as the working-time directive and the temporary agency workers directive) come from Brussels and are not likely to be repealed any time soon. All this EU legislation adds to burdensome compliance costs for business and act as a drag on job creation.

Arguments about tax reform in the UK have been stifled and many just accept the tax system as it is. It's a well-worn way of phrasing it but if you sat down with a sheet of paper to design a tax system from scratch, it would be near impossible to arrive at the one we have now.

In lieu of significant reform, it would be good to see lower rates - or even discuss them. Past evidence suggests that reducing marginal tax rates leads to higher tax receipts (the Laffer Curve), as people see the benefits of working more and have less incentive to employ accountants to find complex ways to avoid tax liabilities.

Without endorsing Rick Perry’s specific proposals as the way forward for the UK, we do need to have a real debate about what our tax system should look like in the future. In the US this debate is far more mainstream and it's a shame that it's seen as boring in the UK. We need an agenda for growth, and significant tax reform could be the missing ingredient the Government is missing.

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