20 February 2023

Should free-marketeers care less about tax cuts?


What does it mean to be a liberal?

The basic programme of liberalism has been remarkably consistent over the centuries, but the emphasis has changed with the times.

For the very early liberals, the issue of religious toleration loomed large. This is because liberalism emerged, in no small part, in response to the European wars of religion. We still believe in religious toleration today, but at a time when churches are being converted into Wetherspoons, we put a lot less emphasis on it.

In the 18th century, liberalism defined itself in opposition to absolute monarchy. We still think absolute monarchy is a bad idea, but unless we are talking about places like Saudi Arabia, today, we wouldn’t put a huge amount of work into rebutting it.

In the 19th century, being a liberal meant, above all, being a champion of free trade. We are, of course, still very much in favour of free trade today. But this is less suitable as a signature issue today, because it is no longer a straightforward battle between free-traders and protectionists. Today, trade barriers can arise by accident rather than design, as a result of regulatory divergence, for which there can be legitimate reasons. This is why liberals can, and do, disagree over Brexit.

In the first half of the 20th century, liberalism was characterised by its opposition to aggressive militarism, and a defence of parliamentary democracy against the threat of fascism. We still believe in all that. But we also steer clear of the modern ‘everything I don’t like is fascism’ discourse. Then in the post-war decades, liberals, like people of most political persuasions, were preoccupied by the challenges of the Cold War, and defined their politics in those terms.

For the current generation of liberals, the issue which has come to epitomise the liberal programme is tax cuts. People elsewhere on the political spectrum want to expand the size of the state, liberals want to shrink it. Yes, obviously, that’s not the full story. Even tax specialists on the liberal side are not single-issuers or monomaniacs. None of us would move to Somalia because taxes are low, and none of us think Sweden is a hellhole because taxes are high.

There’s a lot more to liberalism than tax cuts. But then, there’s also a lot more to Belgian beer than Stella Artois, and yet, if you conducted a poll asking people which Belgian beer, if any, they can name, Stella Artois would be the most common response by a considerable margin. Most people aren’t going to remember your entire political programme. They’ll remember your position on a handful of issues at best, and judge you accordingly.

It is easy to see how the association of liberalism with tax cuts came about. Until at least the 1980s, most OECD economies had absurdly high top marginal tax rates, needlessly distorting and discouraging economic activity. It’s because of liberals that the world has since moved towards a flatter and simpler tax structure, and that has been a good thing.

Nor is the focus on taxation a narrowly ‘economistic’ one. Even if it had zero economic impact, I still wouldn’t want the state to get any bigger than it already is. The state will just spend that money to hire more Diversity Officers, Unconscious Bias Trainers, and other woke scammers. I want you to be able to spend your money in the way you see fit, according to your priorities and your preferences.

So I am certainly not suggesting that liberals should give up on the aim of a small state. Even before the pandemic, public spending in the UK already stood at a little over 40% of GDP. Switzerland manages to provide world-class public services and infrastructure with public spending levels of one third of GDP, while Hong Kong and Singapore do so at much lower levels still. Moreover, if liberals don’t make the case for low taxes, nobody will.

But should low taxes be the signature issue for liberals in 2020s Britain? Should we prioritise this issue above other things?

Let’s have a look at our economic reality. In terms of GDP per capita (PPP), Britain is currently behind Sweden, Denmark, Finland, Iceland, the Netherlands, Belgium, Germany, Austria, Australia, and very marginally, France. Britain is less than 15% ahead of the Czech Republic and Slovenia, which only introduced market economies less than three and a half decades ago. All of those countries have a higher tax burden than the UK.

No, this does not mean that the tax burden is irrelevant. It means that those economies get other things right, and can therefore get away with a higher tax burden. But isn’t that a good reason to focus more on those other things? Even if it comes at the expense of tax cuts? If you are doing badly relative to a peer group, you focus on the things that make you different from the peer group, not on the things on which you are all broadly similar.

The biggest difference has to be that most other countries allow people to build things. Economic activity has to take place somewhere. It requires office space, retail space, lab space, infrastructure, and above all, housing. Growth centres need to be able to expand. People need to be able to move where the jobs are, and where wages are higher, because productivity is higher.

Britain is a NIMBYocracy, run (or rather, pinned down) by people who think economic activity is a nuisance.

If I could press two buttons that would convert Britain into a low-tax economy in which NIMBYs have no power, I would press both of them. But if I had to choose between the two buttons, I would prioritise the anti-NIMBY button. Because this is the bottleneck in which the country is stuck.

The idea that being a liberal reformer means, above all else, being a tax-cutter has real consequences. Liz Truss and Kwasi Kwarteng, who can be seen as representing the liberal wing of their party, chose to make their political entrance with a mini-budget centred on tax cuts. Now, in fairness, their plan was not to just cut taxes, and then go on a long holiday, leaving the rest of the economy as they found it. Tax cuts were supposed to be the opening salvo for a much more comprehensive supply-side agenda. But an economic policy programme is not like a list of household chores, where it doesn’t really matter in which order you do them. If they had put supply side reforms first, and left tax cuts for later, the story of the Truss/Kwarteng government would have been a very different one. (A longer one, for a start.)

One more time: I am not suggesting that free-marketeers should ‘make their peace’ with Big Government. There are no gin-scented tears trickling down the sides of my nose as I type this; the struggle is not finished, and I have not won a victory over myself.

I’m saying that we need to rebalance our priorities. In the 2020s, UK liberals have more to learn from Paul Cheshire and John Myers than from Art Laffer.

This piece was first published on the Institute of Economic Affairs blog.

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Kristian Niemietz is Head of Political Economy at the Institute of Economic Affairs.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.