Touchbutton 86 – Truss the Reaganite?

In announcing tax changes today, Prime Minister Liz Truss’ Chancellor of the Exchequer, Kwasi Kwarteng, has set the country on a radical new course.

In short, the Chancellor has: removed the cap on banker’s bonuses; reversed the planned rise in Corporation Tax; cancelled the most recent rise in National Insurance Contributions; cut Stamp Duty; abolished the additional rate of Income Tax and cut the basic rate from 20% to 19%.

“It has been argued that Truss is the heir to Thatcher…”

It has been argued that Truss is the heir to Thatcher; however, given her reported remarks in New York earlier this week and in particular her favourable reference to the Laffer Curve, she appears to be more Reaganite than Thatcherite. Indeed, the Laffer Curve, which posits that lower taxes pay for themselves in higher tax receipts, was dismissed by then Prime Minister Margaret Thatcher’s first Chancellor Geoffrey Howe who remarked, “I never succumbed… to the mistaken interpretations of Lafferism”.

Following the Conservative victory in the 1979 General Election, Howe, who consistently emphasised the need to narrow the budget deficit rather than engage in unilateral tax reductions, introduced a raft of spending cuts, which essentially paved the way for Nigel Lawson, Howe’s successor, to cut taxes in subsequent Budgets, thereby leading to the ‘Lawson Boom’ of 1986-88.

“Many comparisons were, and have been, made between the policy that Thatcher’s Government was charting and that of US President Ronald Reagan.”

Many comparisons were, and have been, made between the policy that Thatcher’s Government was charting and that of US President Ronald Reagan. On assuming office in 1981, Reagan launched what became known as ‘Reaganomics’ with the main pillars including: increasing defence spending; balancing the federal budget and slowing the growth of government spending; reducing the federal income tax and capital gains tax; reducing government regulation; and tightening the money supply to reduce inflation.

“Truss has very little to say about the vastly increasing deficit…”

Reagan’s address to the American people in January 1981 introducing his strategy is a fascinating commentary on the thinking behind ‘Trussonomics’ but with one glaring difference: Truss has very little to say about the vastly increasing deficit, whereas balancing the budget was one of Reagan’s central aspirations.

Truss must know very well that Reaganomics did not result in a reduced deficit. Indeed, in the eight years that followed Reagan’s 1981 address, the US budget deficit trebled, which was apparently one of the ‘Great Communicator’s’ biggest regrets, although his sanguine remark, “I am not worried about the deficit. It is big enough to take care of itself”, is evidence of a distinct lack of regret.

“So much for Laffer’s famous Curve.”

Moreover, one assumes that the Prime Minister is aware that although federal income tax receipts did increase following Reagan’s tax and regulatory changes, the net effect of these changes was a 1% reduction in federal government revenue during the Reagan Presidency. So much for Laffer’s famous Curve.

But then again, one former US President Calvin Coolidge (1923-29) did embrace the notion that lowering taxes would increase, rather than decrease, government receipts and an amenable Congress passed three successive tax reduction acts between 1924 and 1928, and the federal government tax take attributable to personal taxes is reported to have increased considerably.

But then Coolidge did continue to keep government spending down to reduce overall federal debt.

So, Truss is not a Thatcherite, or even a Reaganite. Moreover, even the example of ‘Silent Cal’ (as the famously taciturn President Coolidge was known) 100 years ago can help us only so far.

The conclusion must be that Truss is a Trussonite.

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