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Monday, August 22, 2005
Dynamic effects of a flat tax

Amity Shlaes has written an excellent article today for the Financial Times on the dynamic effects of lower taxes and a flat tax. She is absolutely right to argue that large nations can expect increased growth and revenues following tax cuts, as well as small nations.

During this year's election campaign in Britain, none of the political parties referred to the dynamic effects of their fiscal policies. The Liberal Democrats assumed that work habits would be unaffected by their new 50p tax bracket for income over 100,000 pounds; the Conservatives fell into Labour's trap by not refuting Gordon Brown's assertion that tax cuts mean revenue cuts; and Labour ducked and weaved their way out of explaining that taxes will obviously have to rise very soon.

The media have suddenly opened up a very healthy debate about the beneficial effects that a flat tax would have for the UK economy and taxpayers. However, if any of the parties are to implement a flat tax or lower taxes they must start by making Amity Shlaes' arguments known to the public much more clearly.

Equally, economic commentators and institutes, such as the Institute for Fiscal Studies, who are the most trusted independent evaluators of fiscal policy in the media, have a duty to include dynamic effects in their models. If they do not, they are guilty of implicitly and unfairly discriminating against tax cutting proposals. This is a significant barrier to reform because, until they do so, tax cutting parties will always face the accusation that their sums don't add up.