On Taxes and Growth

By James Schaefer.

The U.K.’s Chancellor of the Exchequer, George Osborne, wrote an op-ed recently in the Wall Street Journal (“How Britain Returned to Growth”, December 17, 2013), on Britain’s changes to their tax rates and spending as a means of stimulating growth of the British economy.  The results were dramatic.

They began by acknowledging two basic truths:

“First, we are not going to get richer by borrowing more from others in the world just so that we can buy the things they make.  We have to earn our way in the world, by making our countries attractive to overseas investment, better educating our workforces, and providing a climate in which our businesses are able to produce goods and services of sufficient quality that the rest of the world wants to buy them.”

He continues,

“Second, our governments have to live within their means, and not pile up deficits and debts that will burden future generations with the taxes to pay for them.  We have to reduce entitlements and drive value for money through government, so we can focus public spending on areas likely to enhance our productivity.”

Over the past 3 1/2 years Britain’s deficits have been reduced through a combination of cutting spending and welfare (80%) and raising taxes (20%), mainly sales taxes, resulting in a 4.4% reduction in their structural deficit, the largest of any major economy.  Not surprisingly, the richest have paid the most;   importantly, these budget successes have been accomplished while preserving key budget areas such as science, schools, and infrastructure spending.

Most importantly, jobs have been created at a rate of 60,000 per month, roughly equivalent to 300,000 per month in the U.S.

Perhaps there’s a lesson for us.  A “British invasion” — not the fab four this time — of economic common sense might be just the recipe for sustained growth.

Growth is important for two reasons: growth is the basis of government’s ability to tax without hurting the economy; and a strong growing economy is the only thing that backs a nation’s currency.

This is an excellent time to put aside theatric hyperventilating and strident posturing, and look at things that have been proven to actually work.  Let’s follow the examples set by John F. Kennedy’s tax cuts, the recent Ryan-Murray budget agreement, and the Reagan-O’Neill tax cuts.  We need to work together on policies that create incentives for job creation and growth.

Real incentives, that is, of the kind that drove the spectacular growth that brought indoor plumbing and electricity to nearly every American in little more than 100 years.  It wasn’t accomplished by piling debt on the backs of children, or by creating government programs that give cash awards to businesses that create jobs.  There wasn’t even much of a contribution from government programs that gave cash to the poor.  Americans worked their way to prosperity because there was no other way to get there, and there were few barriers in their way.

 

 

 

 

 

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