There has almost been an almost worldwide political consensus that the way out of our economic troubles was through export-led growth. Some of us thought it was a bit silly to suppose that every country in the world could do this. Yesterday however we learned from the Ernst & Young Item Club that actually, if ou want to raise taxes – which let’s face it, most politicians love to do – this is not a good way of going about it.
The reason as Peter Spencer, head of the Item Club explained, “While this is the right kind of growth for the economy, it is the wrong kind of growth for the exchequer — domestic demand is much more tax intensive.”
Exports as it turns out, generate smaller tax increases than a consumer-led upturn.
On all sorts of grounds – the cost of collection, the cost of compliance, the level of evasion and avoidance, understanding the dynamic impact – we are so far away from an optimal tax system. Yet the return of the downturn to the business cycle ought to get us thinking again about which taxes work best at which point of the cycle and which ones don’t undermine aggregate demand.