The government has announced huge levels of proposed debt and borrowing to cover its proposed cap on energy prices, prices that have soared because of NATO's boycott of Russian oil and gas, encouraged by US imperialism, with the UK again playing second fiddle. That comes on top of the huge debts they already had as a result of the massive borrowing and money printing to cover their income replacement schemes, required due to their imposition of the idiotic lockdowns over 2020, and 2021. But, now, they have compounded that with proposals for even more spending, alongside tax cuts. The arguments used for this are the same that liberals have used in the past to justify tax cuts for the rich, based upon the idiotic ideas of Art Laffer, and the Laffer Curve.
It is, of course, true that there must be some point at which raising taxes further causes tax revenues to fall, just as there is a point where raising prices leads to lower sales revenues, because demand falls by a greater proportion than the proportional rise in price. But, the proponents of Voodoo Economics always talk as though it is always possible to increase tax revenues by cutting taxes. They are never seen arguing the other side of the Laffer Curve argument that tax revenues might rise if taxes were raised. The argument relies on the reduced taxes giving a spur to the supply side of the economy, so that entrepreneurs are stimulated to engage in additional productive activity, so that more sales and profits are produced, more workers are employed earning wages, and all of this results in more people paying more taxes, even though the rate of tax has fallen.
But, there is little or no evidence that this is the case. The main determinant of whether a business engages in additional productive investment is whether there is demand for what it produces or not. A tax incentive that encourages a highly productive worker in a large firm to become an inefficient, self-employed producer, would actually reduce productivity, and economic growth, and a large part of the low productivity and sluggish growth in Britain is down precisely to the fact that it has given incentives to these low productivity, inefficient small capitals over the last 40 years! And, demonstrating that the reactionary, petty-bourgeois ideology of Starmer's Blue Labour has no answers, its proposals for hitting big business with more taxes and limitations, whilst providing further support for small business would simply exacerbate that problem. He's as much a Brexitory as Truss!
This Brexitory line on tax cuts is a variation of the argument, in the 1930's, in which the Miseans argued that lower interest rates would stimulate additional investment and economic activity. As Keynes responded, that is like “pushing on a string”. If I am a firm producing 1,000 units of some commodity, and see no prospect of selling 1,100 units at the current price, there is no point in me producing 1,100 units, because, to sell the additional 100 units, I would have to reduce the price of all the units I sell, by say 10%, and that would reduce, then, also my overall profit on those sales. To say that, I might be encouraged to produce the additional 100 units, by reducing interest rates, so that I could borrow more cheaply to buy the additional capital, is no real incentive. Similarly, reducing the tax I pay on the profits, or my other income, is also no incentive to invest more. I will simply just pocket the additional revenue resulting from the lower tax.
By contrast, if the economy is growing rapidly, and I am a firm seeing the demand for the commodities I produce rising rapidly, I will have a direct incentive to invest in additional capital to meet that demand, because, if I don't, competition means other firms will, and, as they do, they will swallow up an increased market share. If they can increase their share enough, and produce on a larger scale, they will obtain all the benefits of economies of scale, reducing their costs below mine, the end result of which is they undercut me, and continue to increase their share until, eventually, I'm forced out of business. In fact, as Marx demonstrates, firms have to respond to the increased demand in this way, even if their rate of profit falls, as a result of the increased investment and supply, even if they must pay higher rates of interest to cover their borrowing for investment, and even if they face higher taxes on their profits.
What is more, in conditions where firms see no basis for expanding production, cutting taxes, which are then just pocketed by capitalists (either from profits or from dividends/interest) simply leads to increased unproductive consumption. One form of that for capitalists is, of course, the purchase of financial and property assets, which is more likely to be one of the real reasons the Brexitories have made this proposal as they also seek to inflate rapidly deflating asset prices. That is why they have also reduced Stamp Duty on the purchase of houses, as rising interest rates begin to crush land prices, and house prices.
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