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July 21, 2022

The Telegraph – Why Thatcher’s tax cuts are so hard to repeat

When Margaret Thatcher came to power, she took the reins of a bloated state which ruled over a decrepit economy and delivered what, to modern eyes, appears to be entirely absurd tax rates.

A year before the 1979 election, the Iron Lady told businesses that tax cuts were vital to a healthy economy — and, once in Downing Street, she delivered on that strategy.

“When we talk about levels of taxation, and attitudes to taxation, we are coming near to the true explanation for our dismal economic performance these past four years and the future to which we are condemned so long as socialism holds sway,” she said in a speech to businesses in Glasgow.

Thatcher pledged a “reduction of the burden of capital taxation that the present Labour Government has imposed on the family firms which are the backbone of our industry and commerce” in the face of “the immense harm” of ever-higher levies.

The issue of tax cuts is once again front and centre in the race to find Britain’s next Prime Minister. Rishi Sunak is seeking to raise corporation tax sharply next year from 19pc to 25pc while introducing new incentives to invest. It is part of a series of raids sending the tax burden relative to GDP to its highest since the 1940s.

Liz Truss has promised to ditch the corporation tax hike, slashing the burden on businesses. As history shows, cutting taxes could boost the economy — much like under Thatcher.

Under the former prime minister’s strategy, corporation tax came down to 35pc by 1986 — a drop of 17 percentage points over her premiership, reducing the 52pc burden on businesses in the late 1970s. 

She also slashed the basic rate of income tax to 25pc and the top rate to 40pc. Prior to her tenure, taxpayers were handing one-third of income to the Exchequer. Those earning more could pay anywhere between 40pc and 83pc, while an investment surcharge took the topmost rate to 98pc.

Tax cuts were not Thatcher’s only tool — defeating the unions and freeing the nation from the grip of industrial strife was also key.

By the end of her era, in 1990, Britain had moved up the rankings for growth compared with other rich nations and was no longer seen as “the sick man of Europe”.

She set the tone for further cuts under John Major and Labour’s Tony Blair, with the benefits of lower levies the orthodoxy as politicians could see healthy economies meant stronger tax revenues.

When the financial crisis struck, Alistair Darling, then-Labour chancellor, responded with tax cuts. He chopped VAT from 17.5pc to 15pc to ease the pressure on households and stimulate spending.

Once the Tories returned to power, VAT went up to 20pc, exceeding its pre-financial crisis level.

Douglas McWilliams at the Centre for Economics and Business Research says the moves up and down provided plenty of evidence that tax cuts are beneficial.

“When Alistair Darling cut VAT — and the Tories put it back up again — the impacts in both directions were quite strong,” he says.

“Although in theory whether people pay through VAT or income tax, it should not in a sense adjust behaviour very much, but people do seem to change their inflationary expectations if they get a VAT cut.”

Though George Osborne raised VAT, he did embark on a series of cuts to corporation tax, slashing the headline levy on businesses from 28pc to 20pc, with another drop to 19pc after he left Number 11.

“As a result Britain went from one of the least competitive business tax regimes to the most competitive — and we raised much more money for public services,” Osborne said in his 2016 Budget speech.

By the time he stood down in 2016, the tax was bringing in almost £54bn per year, up from £40bn in 2009-10. This does, however, overlap with the recovery from the financial crisis, and tax hikes as reliefs were squeezed, making the exact causation hard to prove.

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