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What George Osborne can learn from the Paul Ryan/JFK tax cut plan

14 October 2012

11:35 AM

14 October 2012

11:35 AM

One of the highlights of the Paul Ryan vs Joe Biden debate last week was Ryan attempting to explain that you can lower tax rates and increase tax revenues. “Not mathematically possible,” snapped back Biden. “Never been done before.” It has, replied Ryan. “Jack Kennedy lowered tax rates and increased growth.” An incredulous Biden said: “Oh, now you’re Jack Kennedy?” The audience laughed, but the joke was on Biden. People like him (and he has plenty counterparts in Britain) think that the only way of squeezing more money out of an economy is to increase the tax rates and cut spending. JFK understood that it’s more complicated: you need growth, and you need lower taxes to encourage growth. Here’s what he had to say:-

JFK was making this argument long before Art Laffer doodled a graph on a cocktail napkin. And why? Because this is not a new-fangled theory of neoliberal economics. He was restating basic common sense. Look around Europe today: the countries doing badly are those (like Britain) who think that austerity is enough: cuts and higher taxes will do the trick. Countries that don’t have enough ideas for pro-growth economic policies. People now have still to learn the basic JFK lesson:-

An economy hampered by restrictive tax rates will never produce enough revenues to balance our budget just as it will never produce enough jobs or enough profits… In short, it is a paradoxical truth that tax rates are too high today and tax revenues are too low and the soundest way to raise the revenues in the long run is to cut the rates now.

Sweden’s 2009 stimulus was a permanent tax cut for the low-paid, which has been found to pay for itself almost entirely. That would, presumably, astonish Biden. But not JFK. Here he is again:-

“Our practical choice is not between a tax-cut deficit and budgetary surplus. It is between two kinds of deficits: a chronic deficit of inertia, as the unwanted result of inadequate revenues and a restricted economy; or a temporary deficit of transition, resulting from a tax cut designed to boost the economy and increase tax revenues.”

Given that Biden was around at the time, you’d hope he’d remember that after JFK’s tax cuts, the American economy soared – as did tax revenues.

The taxes of JFK’s America and Reinfeldt’s Sweden were, of course, higher than Britain’s today. But the 2020 Tax Commission (on which I served) shows that there are many, many areas where there is scope to grow the economy – even, for example, copying German-style ‘mini jobs’ where you can earn €400 a month without paying any tax at all. A basic rule holds good: the surest way for government to encourage a recovery is to get out of the way and let people do the rest. George Osborne is a keen student of American history, so I have no doubt that he is fully aware of how JFK managed to steer America away from the low-growth, high-deficit trap in which Britain is now ensnared. He will also know the likely remedies. That’s why I’m looking forward to his mini-budget in December .

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