LAFFER ASSOCIATES

Supply-Side Investment Research

September 29, 2022
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January xx, 2003

The Truss-Kwarteng Tax Plan: Long or Short Britain?

By Arthur B. Laffer, Ph.D. and Brian Domitrovic, Ph.D.1

Last week the new United Kingdom government of Prime Minister Liz Truss announced its fiscal plan. The major elements
are: January xx, 2002xx

1. An elimination of the top, or “additional” rate of the personal income tax, thereby taking the top rate from 45 to 40
percent.
2. A cancellation of a scheduled increase in the main corporate tax rate from 19 to 25 percent.
3. An acceleration of a scheduled reduction in the bottom, or “basic” rate of the personal income tax, from 20 to 19
percent.
4. An expansion of the exclusion of a land-transfer or “stamp” tax.
5. Enhancements of capital spending allowances against taxable business income.
6. Opening of fracking and offshore drilling
7. Diminution of the cap on financial industry salaries.
8. Renewed consideration of the U.K.-U.S. trade agreement.
9. New spending to support energy-expense payments.

In addition to these supply-side policies described above, the Bank of England initially instituted a strong quantitative policy of
tightening, which was associated with rapidly rising interest rates, stock market declines, and weakening of the pound sterling.
These BOE policies have since been significantly reduced.

Hence a supply-side revolution is suddenly gathering in the United Kingdom. Prime Minister Truss, along with her redoubtable
colleague Kwasi Kwarteng as Chancellor of the Exchequer, have set as the goal of their plan the doubling Britain’s economic
growth rate. The quiescence that came over the country during the period of mourning on the death of Queen Elizabeth has
given way to excitement. On the announcement of the tax-cut plan, the pound sterling fell abruptly and has neared historic
parity with the dollar. Yet Prime Minister Truss and Chancellor Kwarteng exuded ripe confidence that they will succeed. If that
confidence is not misplaced (and we believe that it is not misplaced), especially given the crisis of the pound, the present
moment is shaping up as an historic opportunity to invest in Britain.

The headline measure of the tax-cut plan is an elimination of the top (or “additional”) rate of the personal income tax. This add-
on rate stands at 45 percent on income over £150,000. Now income above that level will reach a maximum rate of tax five
points lower, at the current “higher rate” of 40 percent.

For the record, a top rate of 40 percent was the rate that prevailed for a quarter century in the United Kingdom from 1987 to
2010.

A sharp tax-rate cut at the top of the income scale is precisely the opposite of the fiscal policy undertaken in 2010 under the
Labour government of Prime Minister Gordon Brown. Labour took the top tax rate from 40 to 50 percent. Two years later, in
2012, Her Majesty’s Exchequer commissioned a government report from Revenue & Customs looking into the revenue
implications of Prime Minister Brown’s tax increase of 2010. Among its findings (quoting verbatim):

• “The conclusion that can be drawn from the Self Assessment data is...that the underlying yield from the additional
rate is much lower than originally forecast (yielding around £1 billion or less), and that it is quite possible that it could
be negative. The Exchequer impacts of changes in migration can be considerable as the Exchequer loses the tax on
the individuals’ entire income rather than just the income subject to the additional rate.”
• “The extent of the shortfall in tax liabilities in 2010-11 is such that it is relatively difficult to construct a plausible
scenario in which there was not a substantial underlying behavioural loss in that year.”
• “Any behavioural responses that reduce disposable incomes could result in a reduction in expenditure and
corresponding indirect tax revenues. Estimating the proportion of any overall response that relates to real changes
that affect incomes (rather than responses such as increased tax planning and avoidance which do not) is difficult as
most academic studies only estimate the overall behavioural response. However, considering studies which do

1 We thank Nikolai Myers for his invaluable insight concerning the British policy landscape and contributions to our research.

103 Murphy Court, Nashville, TN 37203 (615) 460-0100 FAX (615) 460-0102
Laffer Associates The Truss-Kwarteng Tax Plan: Long or Short Britain?

attempt to breakdown the behavioural response suggest that between one-third and one-half of the response comes
from genuine reductions in disposable income.”
• “The results can only be considered an estimate of the yield in a very short term and as such may be higher than the
long term yield, particularly as some behavioural responses such as the possibility that those affected might leave
the UK may take place over a number of years.”
• “High tax rates in the UK make its tax system less competitive and make it a less attractive place to start, finance and
grow a business. The longer the additional rate remains in place the more people are likely to consider it a permanent
feature of the UK tax system and the more damaging it would be for competitiveness.”2

To its great credit, Exchequer admitted the government’s own failure, in an extensively researched and public report, in raising
tax rates at the top in the aftermath of the Great Recession.

The Truss-Kwarteng plan is much the opposite of what the Brown government had pursued a dozen years ago. If symmetry
persists, one would reasonably expect the opposite response—faster growth and increased tax revenues. The present plan is
nearly exclusively a cut in the top rates of tax. Sharp falls in the top rate of tax, with comparatively smaller attention to the
lower brackets, are rarities in tax history. Japan, under premier Keizo Obuchi, collapsed its top two progressive income tax
rates into one that was lower than the second-highest rate, in 1999, while leaving the bottom rates intact. The amendment
successfully offered by Democratic Rep. William Brodhead in 1981 to the tax-cut bill supported by President Reagan cut
immediately the top rate of the income tax from 70 to 50 percent and the top capital gains rate as well from 28 to 20 percent,
leaving details on cuts elsewhere in the rate schedule to the main bill. In the Truss-Kwarteng program, like in these rare
precedents from around the globe, cuts to maximum personal and corporate rates are preponderant.

Tax cuts that focus on top rates are the quintessential form of supply-side tax cuts. When progressive-scale top tax rates are
cut, it means that there is no higher rate one faces on earning new income than the newly established lower top rate. No other
tax cut has this characteristic. An across-the-board marginal rate cut—for example of the John F. Kennedy (1964) and Reagan
(1981) varieties—reduces all rates of the progressive income tax schedule. These tax cuts leave earners below the top rate
with a tax cut but still facing at least one higher rate if they earn more money. The tax cut aiming at just (or nearly exclusively)
the top progressive rate expends its energy in the most efficient manner. It completely ends the cycle of progressivity for the
earners subject to the rate cut.

The Truss-Kwarteng tax cuts are concentrated on the margin. Cuts in tax rates that are below the top marginal rate—cuts
which this plan does not emphasize—reduce income and tax revenue. Tax-rate cuts under the top rate mean that below top-
threshold earners will still face a higher tax rate on further work while paying less taxes. Getting more after-tax money from
the same income while facing a frontier of higher rates on further income is a recipe for reduced income—as well as tax
avoidance and tax sheltering.
Cutting the top tax rate means that everyone who pays it has a greater incentive to earn more. It is a win/win for one and all.

As we point out in our recently released book Taxes Have Consequences (co-authored with Dr. Jeanne Sinquefield), cuts in
a top progressive income tax rate have unique compelling properties pertinent to economic growth. Top rates affect top
earners, which is to say the people with the most money and the people most involved in the establishment and running of
going concerns. Top earners are the very stewards and visionaries of the economy. As we wrote in our book:

“[T]his group governs the allocation of investment capital, and the management of business enterprises, in the
economy at large. Jeopardize high-earner income via taxation, and the consequences in terms of who gets investment
dollars, and how much, will be severe. So too will be the consequences for the running of enterprises. The higher top
income is taxed, the more the managers at companies employing the mass of the national workforce will be diverted
away from enterprise concerns toward the management of their own financial affairs. The matter is inescapable. High
tax rates at the top force the rich to focus inward on the management of their personal situations. Low tax rates at the
top permit the rich to pursue their natural inclination to put their resources to profitable use in the economy at large.” 3

Prime Minister Truss and Chancellor Kwarteng have clarified the matter for Great Britain. Their plan is to achieve general
economic growth by focusing, preponderately, on top earners—by reducing the final frontier of their taxation. As for those in
the lower echelons of earnings, growth is the answer. The best form of welfare is still (and always has been) a good high-
paying job.

2 Reproduced in Arthur B. Laffer and Rex Sinquefield, A Template for Understanding the Economy (Nashville: Laffer Associates, 2017), from HM
Revenue & Customs, “The Exchequer effect of the 50 per cent additional rate of income tax,” March 2012,
https://webarchive.nationalarchives.gov.uk/ukgwa/20140109143644/http://www.hmrc.gov.uk/budget2012/excheq-income-tax-2042.pdf
3 Arthur B. Laffer, Brian Domitrovic, and Jeanne Sinquefield, Taxes Have Consequences: An Income Tax History of the United States (New York:

Post Hill Press, 2022), 6.

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Laffer Associates The Truss-Kwarteng Tax Plan: Long or Short Britain?

Remember growth?
Economic growth rates around the industrialized world in the twenty-first century have been poor. One is justified in calling the
growth rates begun with the Great Recession of 2008 abysmal. The case of the United Kingdom is prototypical. After World
War II, Britain (bent as it was on industry nationalization) was the laggard in recovering Europe with a growth rate of about 3.5
percent per annum until the 1973 peak. A 1 percent growth rate of 1973-78 yielded the alternative of Margaret Thatcher. From
1978 (the year before the Iron Lady became Prime Minister) through 2000, the annual British growth rate was 2.6 percent.
From 2000 until the economic peak of 2019, Britain grew by 1.7 percent per year. From the modest economic peak 2007 to
that of 2019, the rate was 1.1 percent. Today, British GDP remains fractionally above that of 2019.

A growth and inflation crisis, which itself followed a long period of acceptable if unremarkable growth, was the immediate
precedent in 1979. The same description obtains today, as Prime Minister Truss assumes office. It follows the rhythms of
history for the British political system to put forth, after an agonizing period of economic sluggishness (matched in 2022 as in
the 1970s with price inflation), a bold conservative leader calling for the remedies of free-market economics.

The specific target that Prime Minister Truss has identified is economic growth of 2.5 percent per annum. This is the
approximate number that the long Thatcher era inclusive of the consolidations of the 1990s obtained after wrenching reforms.
A 2.5 percent rate of growth in ordinary times is nothing to get excited about. The United States, for example, regularly grew
at rates over 4 percent in the Reagan and Clinton years, and at 2.9 percent after the Donald Trump tax cuts of 2017. The
economic performance of the twenty-first century, and of the post-Great Recession and post-Covid periods, have been so
mediocre in so many places that growth merely on the order of 2.5 percent appears to require of plodding economies—like
Britain’s—leaps of imagination on the part of the public at large and the markets in particular.

Such may be the link between the pound’s rapid recent fall and the announcement of the Truss/Kwarteng plan. Markets have
become inured to super-slow growth. Here is a new group in power making moderate growth—2.5 percent—a target. Perhaps
in the current environment this can smack of unreasonableness or cluelessness. If generally people no longer believe in greater
than 1 percent growth, the post-2007 norm, then what resources do they have to draw on to show confidence in a program
promising more than double that rate? The public has become desensitized to slow growth over the course of now about a
quarter of a century. It is only natural that markets drawn from this public might bid down the pound, on news that keen new
untried leadership says it can do better.

Historically, tax-rate cuts that have proven enormously powerful did not at the outset regularly come with upward movements
in the exchange rate. The 1978 capital gains tax-rate cut in the United States, by common consensus today the origin of the
venture capital boom if not the modern technological revolution itself, and a crucial predecessor to the Reagan tax plans of the
1980s, saw the dollar fall quite badly. The dollar tanked as the bill came out of nowhere in Congress over the summer and fall,
the brainchild of an obscure Congressman (one advised by Arthur Laffer) named William Steiger and hit a flexible-rate era low
as the bill passed in October. The dollar stayed low for two years until Reagan’s election in 1980.

The stock index tracking the tech revolution, the NASDAQ, was trading circa 125 in 1978, holding there before a 40-fold gain
in the two growth decades of the 1980s and 1990s. If one bought the NASDAQ in 1978, as the dollar hugged lows, the portent
was for two types of appreciation, in both the profit streams of the underlying venture-fed companies and the recovery in the
value of the currency required to buy the stocks of this index. As it happened, the dollar, having sunk in 1978, appreciated
mightily over the first half of the 1980s, then swung down and up as officials wondered whether they preferred a strong or
weak dollar. When the NASDAQ peaked in 2000, the dollar in terms of foreign exchange was comfortably above the levels of
1978. Without any question, buying tech was an investment opportunity for the ages as the capital gains tax-rate cut,
accompanied as it was by a drop in the dollar, became law in the United States in the fall of 1978.

“The primacy of fiscal policy”

Chancellor Kwarteng has offered us an unusual—for a public official—window into his thinking about the relationship between
fiscal policy initiatives and exchange rates. He wrote a book about it, among his numerous scholarly activities in addition to his
career in parliament, inclusive of a Kennedy scholarship at Harvard (the equivalent for Britons of a Rhodes scholarship). In
War and Gold: A 500-Year History of Empires, Adventures, and Debt, Kwarteng contended, as the book’s thesis, that fiscal
policy determines monetary matters. Drawing on a Joseph Schumpeter essay on the theme from 1919, Kwarteng wrote:

It is a premise of this book that government finance…provides a powerful impetus behind developments in
society….More specifically, this book argues that the needs of government spending , in particular relating to war
finance, are responsible for the development of what is often thought of as a narrow and specialist field, that of
monetary history. Currency arrangements…have been brokered in the aftermath, or have collapsed under the
pressure, of war. It is fiscal policy—the character of a government’s spending and taxation—that provides the context
for monetary policy.

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Laffer Associates The Truss-Kwarteng Tax Plan: Long or Short Britain?

Welfare spending, Kwarteng further explains, can serve as a proxy for war spending, determining the contours of the monetary
system and the possibilities of the exchange rate:

Fiscal policies clearly have an additional significance in times of war, but in the modern welfare state government
spending just as central a role in the lives of most citizens. This fact establishes what may be termed “the primacy of
fiscal policy”….The historic record on what I call “the primacy of fiscal policy” is clear. 4

War and Gold is a study after our own heart, of how, to coin a phrase, Taxes Have Consequences. In Kwarteng’s history, the
tail does not wag the dog—the dog wags its tail. Kwarteng tells of how, over 500 years of modern history, fiscal measures of
the major states have determined what their choices were in terms of monetary arrangements. Britain went on a gold standard,
in the eighteenth century, when it found it could finance its war efforts through borrowing without unduly disturbing the capital
markets. In the Napoleonic era, the more intensive warfare bumped Britain off the gold standard. After Waterloo, Britain
returned to gold parity as the Pax Britannica of the nineteenth century settled in. If government finance requirements are
reasonable and the tax system modest, Kwarteng proposed, governments have the pick of their monetary systems. And when
they have their pick, they are shrewd to opt for the gold standard of those systems—namely the gold standard itself.

The central monetary theme that defined supply-side economics, as it arose first under the auspices of the tax revolts of the
1970s and then the Reagan Revolution of the 1980s, was that, contra monetarism and Keynesianism as well, the crucial
monetary matter is not the supply but the market demand for money. If there is robust natural demand for real enterprise uses
in an economy, supplying the right amount of money becomes almost trivially easy. Keep supplying at profitable rates until the
demand trails off.

Monetarism and allied theories asserting the preeminence of the matter of monetary supply achieved intellectual and policy
preeminence, it must be remembered, when the tax system began a long season of gobbling up greater shares of private
economic output. Major countries had progressive tax systems by the late 1960s, when the leading nation, the United States,
raised taxes twice—the income tax surcharge begun in 1968 and the capital gains tax-rate increase of the following year.
Global capital shuddered, leaving financial assets for hedges including not only gold but goods especially of the durable variety
as well. Here was the origin of the Great Inflation of the 1970s. It came as the economic hegemon raised tax rates explicitly—
and then permitted that inflation to feed into the progressive tax code and make increasingly less valuable nominal income
face higher and higher tax brackets.

When monetarism and the problem about the money supply became all the rage in the 1970s and into the early 1980s, it was
in an environment in which major governments, typified by the United States and most certainly including Britain’s (which for
a time superintended a top income tax rate of 98 percent) were conducting tax aspects of their fiscal policy that were collapsing
the private demand for money. Tax increases, and the flexibility to raise taxes at a moment’s notice (the bitter implication of
the American tax surcharge), chilled demand for currency so badly that everything that could be (namely goods and services
in general) was exchanged for currency—the very definition of inflation. Inflation in the 1970s reflected a tax environment in
which it was problematic to have currency-denominated income streams. One had a better chance of accumulating wealth by
shedding currency for hard assets. As goes the trade-off between present and future consumption (or saving), it turned strongly
in favor of the former as the inflation, spurred by high marginal taxes, took hold.

An official steeped in the history of the intellectual and policy revolutions of the Thatcher-Reagan era, not to mention the
political economy of the long history of the finance challenges of the British empire, is not likely to number among those who
have conventional or clichéd views about current challenges. Chancellor of the Exchequer Kwarteng has told us explicitly, in
scholarly work, that fiscal policy drives monetary arrangements. He and Prime Minister Truss openly admire and draw
inspiration from the turnaround that Thatcher engineered by force of will beginning in 1979. They believe, manifestly in the
Chancellor’s case on the basis of considerable scholarship and cogitation, that the currency is a creature of fiscal policy—not
vice versa. If the pound is to sink permanently, then fiscal policy will not have created growth and the demand for capital. But
if fiscal policy does in fact prompt a notable recovery of growth in the United Kingdom—markets will bid the pound, and the
range of assets denominated in that currency, up and up.

The Thatcher precedent

In War and Gold, Kwarteng offered a history of how Britain was able to win for itself a gold standard. It became the preeminent
economy, over the course of modern history, in the era of the global industrial revolution. The gold standard was a present
Britain gave to itself. An historically excellent economy can have the monetary system of the ages, so Britain justifiably
arrogated the gold standard to itself as it captained historic economic progress. A country can only have its currency on a gold
standard if there is great global demand for that currency—otherwise the gold redemption requests would be overwhelming.
The final crown of an economy seeking to make itself the proving ground of vigorous, competitive, booming real-sector
economic growth is to have its currency redeemable to all comers at a fixed rate in gold.

4 Kwasi Kwarteng, War and Gold: A 500-Year History of Empires, Adventures, and Debt (New York: Public Affairs, 2014), 2-3.

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Laffer Associates The Truss-Kwarteng Tax Plan: Long or Short Britain?

In the twentieth century, times of troubles hit. The world wars so sapped and demoralized Great Britain that it—more than any
other place in the West—opted for nationalization and socialism beginning quickly in 1945. The welfare state replaced war as
the driver of British monetary affairs. In the high season of the empire, warfare efficiently fought and judiciously concluded
yielded to long stretches of peace under the gold standard, which made the pound sterling the most desired currency the world
over. In contrast, a large permanent welfare state, with a steeply progressive tax structure accompanying it, constrained British
options in the realm of monetary arrangements. Given the welfare state, the U.K. could not have the gold standard anymore—
who would want the pound if investing in that medium meant heavily taxed profits and income and difficulty in calling forth a
workforce?

In the saga of the Bretton Woods era—the quarter century after World War II in which only the dollar was officially redeemable
in gold, and other major currencies maintained a fixed peg to the dollar—Britain was consistently the laggard, the weak link if
not the butt-of-jokes of the system. In the late 1940s, the system barely begun, Britain needed a big American loan to maintain
its fix. In 1967-68, the pound sterling devalued by nearly 15 percent, notwithstanding the proud Bretton Woods requirement
that currencies not move beyond one percent of par. As the United States itself escaped the gold standard and fixed rates in
the early 1970s, abrogating Bretton Woods, the scolding it got was from countries the likes of France. Britain had no credibility
anymore in the international monetary realm. The pound sterling had been a spectacle of devaluation—in an era of fixed rates
no less—since Prime Minister Clement Atlee’s first big moves at nationalization on elbowing out Winston Churchill as Prime
Minister in 1945. In essence, in this period, “the pound should have been called the ounce.”

This history of currency embarrassment weighed on Margaret Thatcher when she undertook her enormous plans to change
the course of the British economy in 1979 and into the 1980s. Her initial programs were fiscal, not monetary—closing the coal
pits, shedding state firms. In time, she opted for marginal tax-rate cuts, at first on corporate and then on personal income. As
these moves, in the 1980s, drew capital in domestically from the inflation and tax hedges of the 1970s, and from abroad as
other nations participated less enthusiastically in the supply-side revolution, Thatcher displayed a lack of confidence in the
pound which hard history since 1945 had bred in her. She chose to peg the pound to another currency, to a regional paragon
of stability, the West German mark. The result was an acute period of domestic price inflation, in the late 1980s—years after
the global Great Inflation of the 1970s had petered out.

Even Margaret Thatcher had been so chastened by the embarrassments of the pound in Britain’s extensive experiments with
the welfare state since 1945 that she could not conceive of letting the pound find its level. What her fiscal policy wrought was
extreme new demand for the pound. Selling off nationalized businesses, closing massive wasting assets like the coal pits,
cutting marginal tax rates—here was a complement of fiscal policy that promoted strong, sustained demand for the pound from
all corners. If the pound was not to appreciate against the currencies of less reform-minded places, the money would be stuck
pressuring an increase in the price level domestically.

Thatcher’s fiscal policy resulted in tremendous new investor demand for the national currency. But Thatcher mismatched her
monetary program to this fiscal policy. As she cut the top tax rate, Thatcher tied her nation’s currency to that of a country (the
Federal Republic of Germany) not quite as intentional in meeting the Reagan-Thatcher challenge of cutting tax rates and
shrinking the government profile in business and the labor markets. Therefore, the demand for the pound hit a supply limit.
Britain defended a fixed price of pound, even though there was especially strong demand for it. Instead of the currency
appreciating in the foreign exchanges—given the pound’s fix to the mark and the money powering into Britain to take advantage
of the lower marginal tax rate—all other prices in-country soared. The capital influx could not push up the value of the currency,
so it pushed up goods and services priced in pounds. Inflation in the United Kingdom topped 10 percent in the latter portion of
Thatcher’s term as Prime Minister.

In contrast, Reagan sat tight over the first half of the 1980s, as the dollar appreciated sharply in the wake of his epic tax-rate
cuts. Capital powered into the United States from abroad, and up went the dollar. Somehow it went unrecognized that the
phenomenal success of the American economy as Reagan’s tax cuts took hold—13 percent growth in two years, 1983-84, as
inflation tumbled—meant that the dollar had to appreciate. The lesson went unrecognized in the United States itself. In 1985,
the United States began a dollar depreciation policy, the British version of which would play a role in Thatcher’s ill-fated move
to accompany her tax-rate cut at the top with keeping a lid on the appreciation of the pound.

In Liz Truss the United Kingdom has an express protégé of the Iron Lady, clear in her free-market principles and unyielding in
the face of commonplace objections. In her official in the Exchequer, she has a parliamentarian-scholar who has found, in his
academic work, that fiscal policy has determined the course of British greatness over the centuries. In our era of globalization,
it can escape even the keen observer how important the developments within one’s own place, over the years, can shape the
mentality of native inhabitants.

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Laffer Associates The Truss-Kwarteng Tax Plan: Long or Short Britain?

British history since 1945 has a threefold notoriety to the patriotic student of that nation’s political economy. First, the nation
opted for the dole despite Hayek’s warning in the Age of Serfdom of 1944. Second, the pound sterling, for so long an emblem
of British economic and financial regality, became an embarrassment as it uniquely among the major currencies could not
keep up with the regimen of Bretton Woods. The effect of these developments was, first, to render Britain a distant laggard in
the economic-growth race of the postwar era. “Thirty glorious years” and Wirtschaftswunder were the terms competitors such
as France and Germany coined to name what materializing in their countries as a heady postwar prosperity. This is not to
mention growth stalwarts Japan and even Italy through the 1960s. Britain opted for socialism over growth after V-E day 1945,
and with that therefore it lost an option for the gold standard—and of course the remnants of empire as well.

The third major element of the story of British political economy since 1945 was Thatcherism. In 1979 began a manful reversal
of the fiscal policy trends of the previous thirty years, ultimately so successful that at last the pound gained in attractiveness
among the global investment clientele. Yet the experience of the pound since the dawn of the Bretton Woods era had been so
pathetic that even so independent a figure as Thatcher could not bring herself to imagine that it could make it on its own. The
pound’s performance had been shamefully poor by the mid-1970s, when Thatcher was willing herself into power. Whatever
her ambitions in fiscal policy—and they were great—the best she thought the pound could do on the strength of her own efforts
was to match the desirability of the mark. Her fiscal policy was so good that she underpriced sterling.

As for the forsaking of Thatcherism since the 1990s, the one episode that communicates the essential message was Prime
Minister Brown’s government cranking up the top rate of the income tax by ten points in 2010, taking it from 40 to 50 percent.
Two years later came the government ministry report, referred to here earlier, on the revenue effects of that tax increase. It
was a pitiful litany and an utter vindication of supply-side economics. Some more highlights, again verbatim:

• “The modelling (Mirrleess review [named after the theorist of optimal taxation James Mirrlees]) suggests the
underlying behavioural response was greater than estimated previously in Budget 2009 and in March Budget 2010,
decreasing the pre-behavioural yield by at least 83 percent. This result…suggests the additional rate is a highly
distortionary form of taxation.”
• “International labor mobility has increased…, which means the adverse effect of high rates on personal taxation on
both inward and outward migration to the UK and tax revenues can be significant.”
• “[The tax increases] still result in a significant direct Exchequer impact, and are still wasteful from an economic point
of view as they require individuals to spend more time and resources tax planning, resulting in other distortions.”

The tax hike at the top yielded at most all of 17 percent of the revenue static analysis had said it would—and on and on,
inclusive of a section explicitly on Laffer curves.

This material of British political economy over the three quarters of a century since 1945 has lain in the public mind without
benefit of dedicated and scrupulous analysis—until several weeks ago and the abrupt appearance of Liz Truss as Boris
Johnson’s replacement and with her financial counselor and grand strategist Kwasi Kwarteng—rather a Kissinger of his field—
at her side. Thatcher had identified fiscal policy as the driver of both domestic economic enrichment and (after so many
chagrined years) international demand for the pound. However, Thatcher did not realize the full magnitude of her achievement.
In tying the pound to the country of a conventionally growing country, she short-circuited the completion of her own revolution.
Truss and Kwarteng have had the benefit of reflection not only on this episode of recent British political economic history, but
on the dispiriting ebbing away of the Thatcherite revolution since the 1990s and particularly since 2008.

Suddenly this pair-in-power provides a clarity about the entire post-1945 British economic experience and prospects for a new
dawn in the twenty-first century. Of course the markets are shorting the pound—how else would conventional markets behave,
especially after a long era of sluggishness and the entrenchment of diminished expectations? The markets saw no hope in the
dollar in 1978, when the American capital gains tax cut teed up the tech revolution. How could one be an optimist after about
a decade of stagflation already in 1978?

The eurozone GDP growth rate from 2000 to 2019 was 1.3 percent per year, and from 2007 to 2019 five tenths less, 0.8
percent. It has managed 0.066 percent growth since 2019. If the United Kingdom does grow at 2.5 percent, the differential
with its peers will be gaping. It would even challenge the United States, which absent the brief, two-year season of strength
under the Trump tax cuts (forestalled by Covid in 2020) has been stuck with growth rates less than 2 percent and now in 2022
all signs of entering a recession. The impact on capital flows would be difficult to assess—they would be so large. Waves and
waves of capital crashing onto the shores of Britain as an island of leading-nation growth would appreciate the pound to such
a point that the authorities could even contemplate putting it back on gold. Let Britain once again rule the waves as Prime
Minister Truss and Exchequer Chancellor Kwarteng waive the rules.

©2022 Laffer Associates. All rights reserved.

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