The past week has seen the publication of two important studies on the virtues of smaller government by our friends in the United Kingdom.
Neither paper is short, and both are technical in places, but they are both analytically careful and important contributions to the most important debate of our time.
Today, from the Centre for Policy Studies—founded by Heritage patron Lady Margaret Thatcher—comes “Small Is Best: Lessons from Advanced Economies.” Written by Ryan Bourne and Thomas Oechsle and backed up by a detailed econometric analysis, it finds that, in developed countries from 1965 to 2010, a higher tax-to-GDP ratio has “a statistically significant, negative effect on growth.” The same is true of spending: The higher it goes, the worse growth gets. And countries with lower taxes and less spending do better educationally, and no worse on employment and health, than the big-spending countries.
This two-minute video sums up the paper nicely. But the report is so clearly written that there’s no reason for non-economists to shy away from reading it. What’s striking about the supply-side case it sets out is, frankly, how obvious it is. No one denies that government is necessary to enforcing property rights, but to quote Bourne and Oechsle, their case revolves intellectually around the argument that “by encouraging enterprise and risk-taking, the low tax rates in small government countries will lead to higher rates of economic growth.”
If you want to deny that, you have to believe either that government causes growth or that people do not respond to incentives. Bourne and Oechsle make a compelling case that, in today’s world, tax-raising austerity and big-spending growth are equally impossible oxymorons.
The second report, published earlier this week by the TaxPayers’ Alliance, is a remarkably comprehensive report by the 2020 Tax Commission on “The Single Income Tax.” This is the most thorough, most careful, and most clearly written study ever produced by a private organization on Britain’s tax system. It’s not the kind of paper you read in five minutes—taxes in Britain are far too complicated for that—but it is unmatched in its analysis of the British scene.
Its contention is that taxes in Britain are too high, its tax system is too complicated, and both are economically counterproductive. It finds, with Bourne and Oechsle, that economies with larger private sectors grow faster. But its most important conclusions are that the tax system should be simplified, all income should be taxed only once, there should be a single tax rate, Britain should abolish taxes on business (which are really paid by individuals), many other taxes should be abolished or cut, and local government should raise far more of its own money than it does now.
It is difficult to convey how radically this plan challenges every single element of the British status quo. But one thing about it is particularly interesting to an American audience. The TaxPayers’ Alliance plan is not as comprehensive as Heritage’s Saving the American Dream, which addresses entitlement spending and our defense budget. But in the tax realm, it comes to very similar conclusions about the problems created by a tax code that is too complex and discourages savings and investment—and the advantages of a simple, single rate system that abolishes many existing credits, deductions, and taxes.
The substantial overlap between the plans is an encouraging sign for our times and testimony to the fact that both nations are only as powerless to alter their fiscal destinies as they want to be.
