Effect of tax cuts
Sir: In his article on tax cuts (18 August) Tim Congdon was wrong to deny that changes in tax rates can alter living standards. In trying to be provocative he made several mistakes.
1. He talked in characteristic Keynesian fashion of the overall aggregate 'level' of taxation. But would hedeny thatthe detailed structure of tax rates can affect living standards? For example what if the last Budget had increased not reduced top income tax rates by 23 percentage points? Even if such a change did not affect total tax revenue it would almost certainly reduce real gross national product.
2. Mr Congdon says that consumption depends on productivity, so he is arguing that changes in tax rates cannot affect productivity. This implies no effect on incentives if the basic income tax rate were 90 per cent rather than 30 per cent.
3. Mr Congdon also seemed to be assuming that government spending is fixed. But of course a major reason for cutting taxes is to permit cuts in government spending which would allow individuals more choice in how to spend their income. This would affect both the incentive to earn money and the value enjoyed when it is spent. For example, in our opinion transferring welfare services such as health and education from the public sector to the private sector could significantly improve living standards.
()avid Myddelton CUT (The Taxpayers' Union), 71 Fleet Street, London EC4