TDO wrote:
jimbo wrote:
The proposition is "fallacious"because,quite simply, dynamic economies do not respond like this. Shorter hours mean higher unit costs, (unless there are pay cuts), which undermine competetiveness and growth potential. This, in turn, can reduce the demand for labour and lead to higher unemployment.
While there's some truth in what you say, how do you know that the detriments of the French policy outweigh the benefits?
In the last sentence, for example, you don't even use the word 'will', you use 'can', which suggests you are not even certain about your own proposition.
OK, so assuming the detriments to the French policy, what about reduced unemployment benefits and thus taxation, for example, which would in turn stimulate growth?
Well, I'm glad you asked me that.
May I suggest there are two fallacies of similar ilk that beset the current debate over taxation and public spending?
The first I shall call the "lump of tax revenue fallacy", which is based on the notion that changes in tax rates have absolutely no impact on individual or business behaviour and, hence, on the arithmatic link between tax rates and revenue. Given certain taxrates, there will be a "lump" of tax revenue.In a crude example, cutting income tax rates by 10% will result in a 10% reduction in revenue. But tax changes have significant "dynamic" impacts on individual and business behaviour and, hence, revenues. They can crucially influence investment decisions, how much people work and save, or whether businesses move their operations overseas to avoid confiscatory tax rates. All these decisions will have major knock on effects for the overall ability of the economy to grow-and thus generate tax revenue. The static "lump of tax revenue" notion, which crucially ignores these dynamic effects of tax changes, is, therefore, "fallacious". Significantly, it completely fails to allow for the proven fact that judicious tax cuts can stimulate growth and employment and, hence, revenues.
Even though the treasury uses their sophisticated economic model for calculating the effects of tax changes on revenues, including a number of economic variables such as prices,earnings and consumers' expenditure, their calculations do not make any allowance for changes in the taxpayers' behaviour. The calculations are therefore, essentially "static" in nature. This is clearly a major shortcoming and one the treasury should be urgently addressing- not least of all because their forcasting record for tax revenues and, hence, borrowing over the past five to six years has been abysmal despite a reasonable, though far from perfect,record on forcasting the economy as a whole. In his 2001 budget, the chancellor forecast total borrowing of £12 billion for the six financial years 2000-01 to 2005-06. Alas, the total borrowing over this period will turn out to be £120 billion, despite an extra £8 billion of NIC's revenue each year since 2003-04, with the discrepancy overwhelmingly reflecting deficient revenue. Tax revenues have dramatically undershot. This is poor forecasting on a heroic scale. Doubtless, there are several reasons for the poor forecasts. But surely, one reason is the treasury's failure to recognise the ways in which people and businesses react to tax changes.
My second fallacy is the "lump public services fallacy". This is based on the idea that there isarelationship between public spending and public services output. Spend the money, which the Chancellor will insist on calling "investment", and, hey presto, there will be a "lump" of "high quality" services. This flawed idea has undoubtedly been behind the Chancellor's monumental increase in public spending since 2000-01 in order to provide the nation with "world-class" services. Moreover under this mechanistic thinking, if public spending is cut by 5%, then services will be cut by 5%. The notion that better public services, following judicious reforms, can be delivered with less money, is alien. But it is now quite clear that the Chancellor's big-spending gamble is fundamentally flawed. Public sector productivity is falling, public sector waste is growing and the public services remain unsatisfactory. The taxpayersalliance recently estimated that the Government wastes £82 billion annually of hhardworing taxpayers money. The Government has to date, successfully spun the line that lower tax rates inevitably lead to lower tax revenues which, in turn, mean slower public spending growth and, therefore, worse public services. This is nonsense.Lower tax rates will stimulate revenues which, given sensible reforms, could finance much needed improvements in the public services.
Login
Register
FAQ
](./images/smilies/eusa_wall.gif "Brick wall")
