A group of renowned economists have urged the UK's Chancellor of the Exchequer, Gordon Brown, to follow the lead of the United States government by testing the theory that tax cuts do not necessarily lead to a fall in tax revenues and in some instances can boost a country's tax take.
In a letter sent to Brown and jointly signed by more than forty economists under the banner of the Taxpayers' Alliance pressure group, it is argued that the UK government should establish a unit within the Treasury to study the so-called 'dynamic analysis' of taxation which seeks to forecast the economic impact of tax policy, whether positive or negative.
Earlier this year, the White House set up a Dynamic Analysis Division of the US Treasury which will prepare such dynamic analyses of major tax policy changes on the economy.
"We believe such a dynamic model would provide a more accurate analysis than the 'static model' currently run by the Treasury - a model which assumes that any cut in taxation leads to an equivalent fall in revenue which necessitates an equivalent cut in spending," wrote the economists.
Currently, the UK Treasury uses a 'static' model which assumes that a cut in taxation will lead to a fall in revenues and cause the need for a requisite cut in spending.
However, tax cuts introduced under the Bush administration in the United States are believed by many economists to have led directly to higher rates of economic growth, boosting receipts from some taxes such as corporate tax to record levels.
The economists also cited Ireland, where corporate tax was cut to 12.5%, as an example of where reducing taxation "can lead to higher revenues by simulating economic growth."
The letter's signatories included Forrest Capie of the Cass Business School, Deepak Lal of the University of California, Patrick Minford of Cardiff University and Lord Blackwell, head of the Downing Street policy unit under the former Conservative government.
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