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Finally, Osborne cracks the tax cutting code

4 December 2013

When George Osborne releases the bumpf accompanying his Autumn Statement tomorrow, I understand that there will be one paper that will be quite unlike anything presented by a previous chancellor. There will be a study on dynamic tax scoring: ie, recognizing that tax cuts stimulate the economy, and that the Treasury can expect to claw back money when it liberalises.

This paper is seen by Team Osborne as something of a quiet revolution in the Treasury. The machine they inherited was programmed to see tax cuts as a permanent loss to the government, when in fact most tax cuts recoup some of their cost in the extra activity they unleash. The new Treasury paper shows a brand new way of thinking about tax – and one which, if you follow the logic, paves the way for a lot more tax cuts.

This particular paper will focus on Osborne’s flagship reform: corporation tax cuts. He is bringing it down from 28 per cent to 20 per cent, and the analysis published tomorrow will, I understand, say that two-thirds of the ‘cost’ of the tax cuts will be clawed back by the Treasury because of the effect. That is to say: more companies set up in Britain, relocate to Britain or declare taxes in Britain. In this global race, countries must compete for people – and companies. When tax is low enough, they come. Osborne has found a way of factoring this in to Treasury calculations.

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The paper, I understand, suggests that over 20 years, the corporation tax cuts will add about 0.7 per cent to GDP (about £12 billion) and increase business investment by as much as 4.5 per cent of GDP.

Osborne has been wanting to do such calculations this for ages: I remember being told that the new Office for Budget Responsibility would do dynamic tax
scoring. If only. I suspect the OBR (which is, in effect, the Treasury forecasting division in exile) will be deeply hostile to this, and try to cast doubt on the methodology. Ed Balls will go bananas. But they should have seen this coming. Back in March last year, Osborne told MPs (p47, pdf):-

‘There is an interesting question about whether the Treasury should undertake more work on dynamic scoring, in other words trying to take into account more of the economy effects of different tax rates. I am not proposing we change the way the score card is calculated, and I am not proposing we change the way that the OBR does its work—I think we should be cautious about making these changes—but I think the Treasury can now, and I have asked for this to happen, start undertaking some real research into dynamic scoring and what the broader-economy effects are of changes to taxation.’

And tomorrow, he’ll present what he regards as state-of-the-art Computable General Equilibrium Model for dynamic tax scoring.

We say in the leading article for the new Spectator (out tomorrow) that this is a welcome and overdue step. The idea that tax cuts are a dessert to be served up once we’ve finished our austerity gruel is finally being killed off. Sweden used a tax cut for the low-paid as a stimulus to help the economy recover: it was able to do this only because it has an economist as a finance minister (Anders Borg) and he knew that the old static models were nonsense. Sweden is now on its fifth such tax cut. Sweden rejected as false the choice between cutting taxes and cutting deficits.

And 51 years ago this week, someone else rejected this as false. It’s great that the Treasury in 2013 is beginning to grasp what JFK told the New York Economic Club in 1962: the ‘paradoxical truth’ that lower tax rates can mean higher tax yields.

UPDATE Allister Heath’s City AM column finds someone else to support this: JM Keynes.

“Nor should the argument seem strange that taxation may be so high as to defeat its object, and that, given sufficient time to gather the fruits, a reduction of taxation will run a better chance than an increase of balancing the budget. For to take the opposite view today is to resemble a manufacturer who, running at a loss, decides to raise his price, and when his declining sales increase the loss, wrapping himself in the rectitude of plain arithmetic, decides that prudence requires him to raise the price still more–and who, when at last his account is balanced with nought on both sides, is still found righteously declaring that it would have been the act of a gambler to reduce the price when you were already making a loss.”

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Show comments
  • Gareth Stone

    Also – taxation is robbery, so reducing it would be morally good :)

  • Tom Tom

    Using Kennedy as an example is hilarious when you consider Operation Twist and how his polices created the Eurodollar Market in London. For a man who wanted to boost military spending tax cuts would seem to the path to ruin for the US economy and the amount of stimulus George Bush gave the Us economy with tax cuts and arms spending shows just what a wreck it really is

    • the viceroy’s gin

      In both cases, military spending required true austerity elsewhere, but Kennedy died first and couldn’t pull it off, and Bush never worried about it because he’s a neocon socialist.

      Nixon really should have won that 1960 election. The Cold War may have ended many years sooner, and the US may have avoided the Vietnam War .

  • Tony_E

    Tax cuts right now probably won’t do very much – it will be a few pence here and there,nothing significant enough to lift demand simply because there isn’t going to be enough widespread relief at the bottom of the market (and that’s where you have to aim because that is the consumer end of the market – not the saving and investment end).

    He’s be better to look at tax simplification and use that to return some revenue from indirect to direct taxes, at least for individuals. Transparency would be increased, and it would be more progressive than anything that Labour ever did – in fact Labour’s tax system was incredibly regressive with the expansion of indirect taxation under Gordon Brown. Tax credits in some ways were a way of rebalancing that fact, but an expensive one because the recycling of money is never without cost.

    If poorer people can keep more of their own money to start with, relieve them of the cost of items that they need to buy, put that cost into standard rate income tax and continue to lift the personal allowance, that would be the best way to stimulate demand amongst the widest number of people.

    • Alexsandr

      Get the middle classes spending. We need a movement of the 40% rate up from incomes of around 40K to about 50K
      40K is not ‘rich’, especially if only 1 earner in a household

  • Redvers Cunningham

    Osborne should have briefed Cameron on this startling “discovery” before Cameron ruled out tax cuts until 2020.

    • Makroon

      Exactly. He would have needed to use words of one syllable and counted on his fingers to explain to our innumerate and rather dense PM though.
      Or perhaps a better way of explaining would be to tell our Prime Moron that without tax cuts he will lose the election !!!

      • Daniel Maris

        LOL – that’s the best one yet. “The bankers have not been awarded enough through the remuneration committees and the million pound bonuses. They need another 10% off income tax and corporation tax.”

        Yep, that’s gonna go down well with the electorate, suffering year on year decline in disposable income (thanks mostly to wage freezes and inflation, not tax increases).

        • Alexsandr

          the electorate dont care about bankers. they care about the crippling amounts of tax they pay. they look at their wage slips and weep.

          Lets start with NI which starts at an appallingly low wage. And is a real disincentive to employment.

  • Daniel Maris

    The main problem with this is that the UK is a big economy. What do you think will be the reaction of other countries if the 20% rate really does start attracting companies away from mainland Europe? Yep, a 19% rate. And what will our reaction be then. Competitive reduction in corporation tax is not a sensible long term policy.

    • Greenslime

      Most of the countries in Europe are run by idiots like Balls and Moribund. They would no more cut corporate taxes than they would stick a pin in their own eyes. As far as they are concerned companies are there to milked until the pips are squeaked dry. At best to be treated cautiously, at worst, enemies. But wherever they are on that spectrum, they are there to act as a money tree with which to buy votes. The thought that you can cut taxes, any taxes, to raises tax revenue just wouldn’t enter their little heads and anyone who posited such a position would be drummed out pdq.

      • dalai guevara

        Let’s get this one straight – no one ever, in the entire history of mankind and politics, has ever managed to do what Gidiot is about to do: double the national debt in one term with ab-so-lutely nothing to show for it.

        I mean, even a socialist Mitterand got some grands projets out of it, a socialist Schroeder restructured society with his Agenda 2010 and made them competitive again, but Gidiot? He’s selling selling selling, one hard asset after the other – trains, planes, automobiles, ports, nukes, everything – but still the debt doubles IN ONE TERM!

        And some chaps still want to make us believe these was now somehow all due to state spending – what sudden spending is that?

        “There are no extra unemployed!
        One million new jobs created!
        The economy is growing!”

        These and other lines are worse than the Eurovision Song contest.

        Royaume Uni – pas des points,
        Grossbritannien – keine Punkte,
        Great Britain – no points!

        • the viceroy’s gin

          Yes, national debt isn’t due to state spending. It’s those fairies whadunit.

          You are a socialist nutter, pure and simple.

          • dalai guevara

            Te-he. What state spending? On what? What sudden expense would warrant Gidiot accruing another £600 thousand million of debt in three years (!), even after selling the RM, taking their pension pot prior to that, and given there is NO RISE in unemployment, one MILLION new jobs created and a GROWING economy?

            • the viceroy’s gin

              “What state spending?”

              You see, children, there IS no state spending. We know this to be true, because the socialist fairies vanished it all.

              And therefore, there is no debt accrued as a result of the now-vanished spending.

              What would we do without socialist nutters and their fairies?

              • dalai guevara

                what? what? what? Sudden, new, extra, on top, surplus to prior requirements state spending? On what?

                There are no extra unemployed, one million new jobs created and you will have guessed by now, the economy is growing! Socialist wiff waff waffle, surely.

                • Colonel Mustard

                  All this is readily available online in excruciating detail. Far more so than when Brown was fiddling the books and you were far less inquisitive or challenging. Which is the crux.

                • dalai guevara

                  Yes, I know – a readily available sudden fix in excruciating detail.

                  A million new pensioners to feed, all of a sudden? No.
                  A million new immigrants on the dole, suddenly? No.
                  A million new council houses built and paid for? No.

                  So I will say it again, to be absolutely clear. What are we paying an extra £600bn for since Gidiot took over? And that’s after selling RM and reducing cost in the regions. £600bn!
                  There is only one possible answer…they are still at it.

                • the viceroy’s gin

                  …you mean, the banksters you socialist nutters bailed out?

            • Colonel Mustard


              Note the chart showing the payment of Mr Brown’s interest accrual. That’s the Mr Brown who spent and borrowed during a boom. You might be better asking him – or perhaps Mr Byrne – where all the money gone.

              • dalai guevara

                There is nothing in there that would blow me away. Pensions up by 100% in ten years? That’s simply inflation.
                Rule of thumb:
                10 years, prices double
                40 years, add a nought

                • the viceroy’s gin

                  …yes, but have you checked with the socialist fairies on that? Can’t have proper socialist nutter economics without the fairies, can you?

    • rubyduck

      Give me one reason for the existence of a corporation tax.

      Share holders are taxed on dividends, employees are taxed on earnings, sales are subject to vat. Why should a company be taxed further, simply for existing?

      • Alexsandr

        Politics of envy. ‘Shareholders are greedy taking the money out of hard working families.’
        Trouble is that most shareholders are pension funds investing for us, so the whole thing is a closed circle with the government taking a cut at every interface.

        • Tom Tom

          Crap. Pension Funds have dumped Equities and most are technically insolvent. what do you think QE does to a pension fund ?

          • the viceroy’s gin

            When it’s underfinanced, as most are, QE balloons the fund. That’s one of the main missions of QE. They’re flailing to keep pension funds afloat, when they should be allowed to go kaput.

      • Tom Tom

        Why not ? The Corporation Tax is offset against Dividends. It was the
        Conservatives that introduced Corporation Tax in 1922 and Labour
        abolished it in 1924 because Philip Snowden thought like you do.

        would be funny to allow people to ecape tax by incorporating themselves
        like Fiona Bruce Ltd, Terry Wogan Ltd, Jeremy Paxman Ltd

        • the viceroy’s gin

          …but they’d eventually have to take income out of the corporation, and that’s when they’d get taxed.

          Not to mention all the other taxes and fees corporations pay as a matter of course.

      • Tom Tom

        Why should Limited Liability exist ? Why not make all Corporation
        Profits flow through to Shareholders and stop Retained Earnings or Debt
        Interest Relief ?

        • the viceroy’s gin

          Sounds good. Let’s get the revolution started.

    • Andy

      A sensible long term policy is the complete abolition of Corporation Tax.

      • Alexsandr

        I think all income should be taxed at a flat rate when it becomes personal income. All the weird taxes are obfuscation of the true cost of government.

        • Andy

          I believe we should have a Flat Tax. I would abolish Corporation Tax because the income generated by a company is taxed when distributed as dividends. This would provide companies with a sold base for investment which they never seem to have. And I agree that such an arrangement would reveal the true cost of government and make it more difficult to hide.

  • Curnonsky

    What would happen if Osborne applied his “dynamic scoring” to all the green taxes he and his pink-cheeked mate have so eagerly imposed on the economy?

    • the viceroy’s gin

      Here, let me dynamically gues… er, I mean… score all that envirowhacko stupidity:

      Unemployment rate rising by a factor of 1.332%

      Disposable income falling by a factor of 2.651%

      Manufacturing output falling by a factor of 2.158%

      Economic growth stifled by a factor of 1.289%

      Trade deficit rising by a factor of 1.889%

      Tax revenues falling by a factor of 1.413%

      Government deficit rising by a factor of 1.755%

      You may ask: “Why go out 3 decimal places? It’s a fuxxing projection for fuxxsakes.” Well, I notice Boy George’s lackeys sometimes seem to like using 3 decimal places when they make their economic gues… er, I mean, that is, estimates, so I figure when in Rome…

    • Roger Hudson

      Green taxes are a total con, created by jobsworths to feel ‘good’, if we cut our energy use to zero that would be outweighed by a few ‘new’ cities in China or India, total rubbish.
      Cutting the consumerist trajectory is the answer, live within our means.

  • John F Kennedy

    ”Larsh year… Dahpartment of Dahfense… fifty-fawwhh pahcent… shurely capable… great shociety… budget shurplus… tax revenuesshh… shurely affawd…”

    • Sim Chi

      How’s death treating you Fitzy?

  • the viceroy’s gin

    Kennedy was a fiscal conservative, and demanded that government spending programs be flyspecked, all of them, to extract whatever waste and duplication existed. Such an approach leaves one the stature to ask for tax cuts.

    On the other hand, big spending socialists like your Cameroonian buddies, who far from engaging in “austerity” as you’re still claiming in this misguided blogpost, spend like drunken sailors even more drunken than Darling in his original budget, and have no legitimacy in asking for tax cuts, other than those that they themselves slammed down on an economically suffering People, as a first act.

    • IanH


      • HookesLaw

        You can say that again.

      • Alexsandr

        well done. good analysis of VG’s post. you have shown real insight to his point of view and have added immeasurably to the debate

        • HookesLaw

          Indeed an acute and perceptive analysis.

      • Chris lancashire

        You have to excuse him, he’s not a well person.

    • Daniel Maris

      Something went wrong with your computer. I think your post should have read “Kennedy was a bloody socialist nutter”.

      • the viceroy’s gin

        No, the computer is fine. That term is reserved for you socialist nutters.

        • Daniel Maris

          You left out one little point about Kennedy – he was cutting the top marginal tax from 91% to 65%. So if you are saying a tax rate of 65% doesn’t make you a socialist nutter, then I am content with that.

          Noteworthy is the fact that the USA had very little debt at the time.

          (Thanks to the Washington Monthly for that info).

          • the viceroy’s gin

            You’re obviously ignorant of tax policy, and actually believe that tax is paid at marginal tax rates, in any country. Most of you socialist nutters believe that, which is one of the reasons you’re socialist nutters.

            • Daniel Maris

              Well if it isn’t paid by anyone, presumably you have no objection to a 65% rate.

              • the viceroy’s gin

                You have difficulty with reading comprehension, apparently.

                Again, I’d recommend you educate yourself on tax policy, to resolve your glaring ignorance of same.

          • Tom Tom

            Noteworthy is the fact that Sterling was locked behind Exchange Controls
            and Bretton Woods pegged the exchange rate and each country operated a
            tariff system with much of the world’s population outside the global
            trading system

    • dalai guevara

      Ahhh right, so there was no austerity which is wrong, but then there was austerity which was wrong. Hahaha! Tovarishch, you are a cracker!
      I just h a v e to vote for you now, using the right voting button…

      • the viceroy’s gin

        …can another of you socialist nutters translate this nutter’s gibberish?

        • dalai guevara

          Everyone’s a socialist nutter, Cameron is, Balls is, Osborne is, Yeo is, so is Davey (oh yes he is indeed), Brown was, so was and is Major (!?!) – absolutely everyone’s a socialist, ergo everyone understands it. Only you don’t.

          • the viceroy’s gin

            No, not everybody is a socialist nutter, but you definitely are.

            • dalai guevara

              oh yes, ev e r y o n e is a socialist nutter, only you’re not – that’s why you will not understand how the world works, and may I add, progress.

              • Daniel Maris

                I think he’s reached the stage where he suspects even he, himself, is a socialist nutter. :)

                • the viceroy’s gin

                  Are the voices telling you that now?

              • Colonel Mustard

                I’m not a socialist nutter. A nutter maybe – but not a socialist one. They have proliferated though as the centre ground has shifted – or more accurately been shifted – leftwards and their narrative has been conceded to or taken up by those who really ought to know better.

                • dalai guevara

                  Apologies Colonel, I forgot you were there.
                  Of course the centre ground has shifted, because it had to – all these socialist nutter nations, Russia, Germany, France, Venezueala, Norway, China, you name then, I put them on a map for you:

                  …whilst Anglo-America and Aussie go only one way…down under.
                  Of course the centre ground has shifted, irreversibly, because GREED took over. Now blame socialists again.

                • the viceroy’s gin

                  …what, blame them for you being a socialist nutter?

              • the viceroy’s gin

                No, not everyone is a socialist nutter, but you definitely are.

      • Colonel Mustard

        Austerity is largely an invention of the collective left, like “bedroom tax”. As the jewish problem was an invention of those other national socialists. Socialists must always create demons and pernicious, nefarious activities for their political opponents. They themselves remain blameless, even when in power for 13 years, and as pure as the driven snow. They mean well, you see, so they literally get away with murder.

        • Tom Tom

          So “the Jewish Problem” was a product of National Socialism was it ?
          You are wildly misinformed by your uneducated teacher. The Russian Czars
          had the same problem which is why they created The Pale, and so did
          Stalin who was ready to start purges in 1953…..but suddenly died……

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