Tax cuts are back in fashion

November 10, 2008 12:09 PM

Whilst the financial crisis and recession are worrying news for all of us, there are a few rays of light.  One of them is that all parties are now signed up to cutting taxes – we look forward to seeing the details.  This political shift may have come partly from the growing necessity of a fiscal stimulus to reduce the severity of the downturn, but it’s also evidence of a longer-term trend:


1. Voters are increasingly in favour of tax reductions.  A ComRes poll for the TPA found that 59 per cent think that “the Government should tackle the economic crisis by cutting taxes rather than increasing spending”, with voters of all parties strongly agreeing.  ConservativeHome reports that the vast majority of Tory members want lower taxes.  Abroad, voters in the US and New Zealand opted for “novices promising tax cuts” last week, while the Canadian Conservatives increased their share of the vote by campaigning against proposals for new taxes, particularly green taxes, from the opposition Liberals. 


2. Politicians are realising that a fiscal stimulus is best carried out on the tax side.  The length of the planning process means that many infrastructure projects would not start until the recession is over anyway.  It’s therefore far better to put spending power in people’s hands immediately – the risk is that they may save most of it or use it to pay off their credit cards, but given that excess borrowing was one of the factors that got us into this mess in the first place, that may be no bad thing.  In other words, the importance of lower tax in supporting the economy is becoming increasingly accepted – if tax cuts can help the economy in the bad times, they can also help improve growth in the good times. 


The TPA has been consistently arguing the political and economic case.  It’s encouraging to see both public opinion and political leaders moving in our direction.  But, as has been pointed out elsewhere (e.g. by Trevor Kavanagh in the Sun today) it is rather surprising that the leaders of this shift have been, not the Tories, but the Liberal Democrats. 


The Conservatives are now racing to catch up with both the Liberal Democrats and the Government, in large part because they have not formulated a credible tax policy, other than the entirely negative one of refusing to promise any reductions in the record burden of tax.  If they had adapted their position to the changed economic circumstances, which were evident a year ago when Northern Rock fell into difficulties, and promised to support families and businesses through the downturn by cutting taxes overall, they would now be leading the way. 


Hindsight is an easy thing, but the obsessive fear of being seen as the “nasty party” by promising overall tax reductions has meant that the Tories have missed a big opportunity.  The lessons they learnt from the Inheritance Tax success were the wrong ones – the IHT cut was not popular because it was “revenue-neutral”; it was popular because it was a large cut in an unfair and unpopular tax. 


Politics has changed a lot recently.  Overall tax cuts are now the “nice” thing to do; tax increases are now “nasty”.  If this mood can be sustained after the recession is over, taxpayers will have won a great victory. 

Whilst the financial crisis and recession are worrying news for all of us, there are a few rays of light.  One of them is that all parties are now signed up to cutting taxes – we look forward to seeing the details.  This political shift may have come partly from the growing necessity of a fiscal stimulus to reduce the severity of the downturn, but it’s also evidence of a longer-term trend:


1. Voters are increasingly in favour of tax reductions.  A ComRes poll for the TPA found that 59 per cent think that “the Government should tackle the economic crisis by cutting taxes rather than increasing spending”, with voters of all parties strongly agreeing.  ConservativeHome reports that the vast majority of Tory members want lower taxes.  Abroad, voters in the US and New Zealand opted for “novices promising tax cuts” last week, while the Canadian Conservatives increased their share of the vote by campaigning against proposals for new taxes, particularly green taxes, from the opposition Liberals. 


2. Politicians are realising that a fiscal stimulus is best carried out on the tax side.  The length of the planning process means that many infrastructure projects would not start until the recession is over anyway.  It’s therefore far better to put spending power in people’s hands immediately – the risk is that they may save most of it or use it to pay off their credit cards, but given that excess borrowing was one of the factors that got us into this mess in the first place, that may be no bad thing.  In other words, the importance of lower tax in supporting the economy is becoming increasingly accepted – if tax cuts can help the economy in the bad times, they can also help improve growth in the good times. 


The TPA has been consistently arguing the political and economic case.  It’s encouraging to see both public opinion and political leaders moving in our direction.  But, as has been pointed out elsewhere (e.g. by Trevor Kavanagh in the Sun today) it is rather surprising that the leaders of this shift have been, not the Tories, but the Liberal Democrats. 


The Conservatives are now racing to catch up with both the Liberal Democrats and the Government, in large part because they have not formulated a credible tax policy, other than the entirely negative one of refusing to promise any reductions in the record burden of tax.  If they had adapted their position to the changed economic circumstances, which were evident a year ago when Northern Rock fell into difficulties, and promised to support families and businesses through the downturn by cutting taxes overall, they would now be leading the way. 


Hindsight is an easy thing, but the obsessive fear of being seen as the “nasty party” by promising overall tax reductions has meant that the Tories have missed a big opportunity.  The lessons they learnt from the Inheritance Tax success were the wrong ones – the IHT cut was not popular because it was “revenue-neutral”; it was popular because it was a large cut in an unfair and unpopular tax. 


Politics has changed a lot recently.  Overall tax cuts are now the “nice” thing to do; tax increases are now “nasty”.  If this mood can be sustained after the recession is over, taxpayers will have won a great victory. 

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