Wednesday, June 15, 2016

Hell Freezes over - the ASI opposes a tax cut

It's not very often that the Adam Smith Institute opposes a tax cut.

They started out their article about the Vote Leave proposal to 5% VAT rate on Household Gas and Electricity with this excellent quote from Milton Friedman:

And it must have taken a degree of moral courage to oppose a popular policy from Vote Leave a few days before a referendum in which I suspect most of the ASI will be voting for that side.

However, that is what the ASI have done, here, and what they were right to do.

Cutting the rate of VAT on energy is an extremely bad idea and the Adam Smith Institute is right to say so. If you want to help the poor there are far more effective ways of doing so.

There are nearly always sound economic advantages in cutting tax rates and thereby reducing that distortion which taxes cause to the economy.

But creating more exemptions from tax is usually the least beneficial way to cut taxes. It can be a good idea if there is something which in the interests of society you really want to encourage - as for example, when British car drivers changed over incredibly quickly from leaded to unleaded after the government introduced a lower tax rate for the unleaded variety.

So is it in the national interest to encourage people to use more energy?

Of course not. Absolutely the reverse. You only have to put the question to realise that the idea is utterly ridiculous and for both environmental and national security reasons we want to encourate people to use less energy, not more.

Is cutting VAT on energy the best way to improve the relative welfare of the poorest in society? Absolutely not, as the ASI argues.

If you want the tax system to do as little damage as possible it needs to be as simple as practical with as few exemptions as possible so that tax rates can be as low as possible. Extra tax exemptions is not the way to achieve this.

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