Taxes should be cut to 33 per cent of national income

There appears to be a limit to the taxable capacity of the British economy, with taxes seemingly unable to raise more than 40 per cent of national income. This is a result both of political constraints, and of taxes harming the economy and thereby shrinking the tax base.

High marginal rates lead to the migration of economic activity, create a deadweight loss of economic activity that does not take place, and reduce taxable income.

"An old HM Treasury rule-of-thumb stated that the sustainable taxable capacity of the British economy was around 40 per cent of market price GDP"

 

Ratio of UK tax receipts to GDP

 

High taxes are unethical

The moral arguments for taxation are well known: they are necessary to fund large public projects such as roads and bridges; to pay for essential functions such as defence and the justice system; and to produce a more equal society through redistribution of income from rich to poor. The moral arguments against, less so.

Dr Eamonn Butler: The morality of taxation

 

Matt Ridley: Doing your altruism through the tax system

"There is in all of us a tension between the individual wish to increase our wealth and the social wish to see greater equality between people. Politically, debates over tax boil down to an argument between those who want to emphasise wealth creation and those who want to emphasise wealth distribution: tax cutters worry about crimping economic growth; tax raisers worry about social cohesion. Yet is it quite that simple? Is wealth creation really so selfish, and is taxation really so altruistic? A journey into the psychological and evolutionary roots of this debate reveals some surprising things."

Read the full essay

 

“Whereas private extravagance is eventually punished by bankruptcy, public extravagance is rewarded by budget increases”

 

There is a limited set of legitimate objectives for government

There is a certain limited set of objectives for government, and limits on the extent to which they can be pursued and enhance social welfare. Research suggests that extra spending ceases to contribute to increasing welfare beyond 35 per cent of national income. This, therefore, should be seen as the maximum justifiable level of public spending.

It is legitmate to spend to support essential services - national defence, a police force and criminal and civil justice system - as well as to support other services - roads and infrastructure, schools, hospitals and a social security system - though less so as the marginal benefits diminish as spending rises. The state also has a role supporting those in need, though not to the extent that creates dependence, and in promoting opportunity for all.

"Beyond a certain point, generous benefits become a burden that reduce both the welfare of those who pay for them, and the virtue of those who come to depend on them"