Yuill Irvine: When more means less, it's worth having a second thought

IT IS strange that the Tory-Lib Dem Consortium has not yet been tempted to embrace that pinnacle of right-wing economic theory – the Laffer Curve – which attempts to prove that raising taxes actually decreases a government's tax take.

In Scotland, we can show such fiscal incompetence, which certainly proves the theory. It is none other than whisky, which accounts for 25 per cent of all UK food and drink exports (90 per cent in Scotland) generating more than 3 billion for the balance of trade, while 40,000 people depend on the industry for employment.

Duty increases of 15.7 per cent since 2008 have driven down the releases from bond to levels not seen for 40 years. The one-year decline in 2009 amounted to 21.5 million bottles and resulted in 49m less revenue from spirits for HMRC.

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With 70 per cent of the cost of a bottle of blended whisky being tax, Britain is the only major market in the world where consumption and excise receipts to government is actually falling.

Nonetheless, clouding this controversial theory, there are statistics that seem to prove exactly the opposite. For example, in the US between 1947 and 1964, top-rate tax was 91 per cent. The US economy should therefore have been deeply depressed but, in fact, it was enjoying its longest sustained boom of the 20th century.

In contrast, President Ronald Reagan slashed tax rates in the Eighties. A severe recession followed in 1982 followed by fairly average growth. In 1993, Clinton increased rates by nearly 30 per cent to 40 per cent and a period of economic prosperity followed.

However, like all economic theorising, there will be exceptions to the rule and the Laffer Curve is no different. Common sense suggests that Laffer's theory is worth more than a passing glance. People tend to resist being legally robbed, so when taxes soar, successful business people will be increasingly encouraged to pack their bags and leave.

There is also considerable practical economic evidence to support Laffer's theory.

Recent figures from the Institute of Fiscal Studies illustrate a steady decline in intrinsic domestic wealth since Margaret Thatcher revolutionised Britain's Sixties and Seventies reputation as the sick man of Europe into the successful "loadsamoney" economy of the Eighties.

Illustrated in terms of household disposable income – the most accurate measure of domestic wealth – Thatcher inherited an impoverished economy where weekly household disposable income was 150, expressed in today's prices.

There was a steady if not dramatic increase under her tenure at an average 2.6 per cent a year. Her successor, John Major, did not rock the boat, continuing to slacken the tax burden, and so managed to keep British households ticking over at a 2.3 per cent increase.

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Labour won its way back into power in 1997 when weekly disposable income was 250 and in the three election periods thereafter, against a backdrop of increasing taxes, growth in household disposable income declined steadily from an impressive 3.2 per cent a year largely inherited from the Tories, to 2 per cent and finally to 0.7 per cent under the Blair-Brown administration.

In summary, overall household income rose an average of 2.5 per cent per annum under Conservative rule and 2 per cent under Labour.

Equally, that barometer of economic health the FTSE 100 has shown its disapproval of UK fiscal management with the index lower at the end of 2009 than it was ten years ago – hardly a ringing endorsement of the present government's management of the economy.

Right now, with the new 50 per cent rate (actually with the loss of personal allowance, it's 60 per cent), the Laffer Curve theory seems set to steadily deliver the unpalatable news that, with the implementation of new and penal rates, the UK's top earners would appear to be planning their exit in some numbers.

Let's hope the new government comprehends the Laffer Curve theory. But is it possible to observe the professor's teaching with a near 200 billion deficit needing to be repaid?

• Yuill Irvine is managing director of Dunedin Independent.