I have never received such a large e-bag in response to one of my articles as I did after last week’s piece on the moral case for low taxation. And I am delighted to say that it was overwhelmingly favourable. So I have decided to follow it with my take on the economic arguments for low taxation.

Taxes drive a wedge between the market value of an activity and the amount received by the producers of it. When taxes are imposed on the returns from work, the risk is that less labour will be supplied. At the margin, as and when they can, people will choose untaxed leisure over taxed work. Some may even choose a life on benefits.

The tax wedge may also substantially affect the use of leisure time. Doubtless there are some people who actually enjoy DIY or washing the car, but for most surely the choice to “do it yourself” is about cost. They could work a bit more to earn more money and use the money to employ a builder/ decorator/car washer but if they do this they will pay tax on their extra income and the workman will pay tax on the money they pay him. By contrast, if they decide to do these jobs themselves no extra tax is due. This represents a gross distortion in the economy. In a world of low tax on incomes, a host of activities which people currently perform themselves outside the money nexus would instead be bought in from outside professionals, thereby freeing up their customers’ time for real leisure or more work.

But the efficiency of the tax system has to be viewed together with the economics of public spending. There are some forms of expenditure which can only reasonably be undertaken at the community level. These are the so-called public goods, of which defence is the most obvious, but they also include law and order and the provision of various sorts of infrastructure. Since these public goods are essential, some loss of economic efficiency from the imposition of the taxes necessary to fund them becomes acceptable.

David Fuller's view

Most readers will be familiar with these arguments but they are worth reviewing ahead of the debate and discussions before your next important election.  Moreover, Roger Bootle knows far more about this subject than most politicians.