GALLERY GUIDO: Osborne, the Laffer Curve and the Left

There’s a Computable General Equilibrium Model at the Treasury. If it were made of string and resin it wouldn’t be any less reliable, but its predictions about the cut in corporation tax are likable, so let’s quote them.

The Treasury select committee told us the computer is forecasting corporation tax going from 28 pence to 20 pence will increase GDP between 0.6 and 0.8 per cent, and will increase business investment from 2.5 per cent of some damn thing or other to 4.5 per cent.

It’s “a quiet revolution” George Osborne says, of this example of the Laffer Curve in action.

This curve is still mocked by the left. But it has an interesting pedigree.

An early exposition from the 1930s put it like this:

“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.”

That is – the budget can be balanced by reducing tax not increasing it.

“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.”

“The act of a gambler” to reduce taxation. “A dangerous experiment” as it might be said. An ideological leap into the dark. These criticisms are still made by the left, and even by Red and Redder Eds.

The author of the proposition was one of the few economists capable of writing a phrase like “the rectitude of plain arithmetic”. But then he wasn’t an economist from birth.

It was John Maynard Keynes.




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