Too taxing for the politicians

ART LAFFER is an economist who has probably had more influence on political thought and development than any other person in the past 20 years. He hit on the idea that if you cut personal taxes, overall tax revenue will increase because people will work harder and earn more and there will thereby be a bigger cake to tax.

His genius, however, was to take the theory out of the textbook and into the market place, where he sold it to a Presidential candidate called Ronald Reagan. He, having won the 1980 US election, then applied it to kick-start the US economy by ignoring the federal deficit and cutting income tax, setting off what came to be seen as a 20-year boom. Supply side economics, as it became known, subsequently swept the world.

At breakfast in London yesterday Laffer was too polite to say that the British Government was in danger of forgetting this fundamental lesson or that the more Chancellor Gordon Brown increases tax the more the flower of British economic performance is likely to wilt, the poorer we will all become, and the less revenue Brown will raise.

But his host, the pressure group Reform, said it for him. Reform, a recently-formed non-party group chaired by former Vodafone chief Sir Christopher Gent, feels it can no longer stand idly by and watch the squandering of money on the public services. It is dedicated instead to finding another way to fund and run them. As fuel for this debate it published yesterday at the Laffer breakfast a paper by Graeme Leach called The Negative Impact of Taxation on Economic Growth.

Two of Leach's points merit attention here. The first is that Laffer works and you can correlate the world's fastest-growing economies with the countries with the smallest State sectors.

There are cases where it does not work - Japan having a small State sector and no growth to speak of, and China, which is largely State sector and going like a train. But even with these aberrations, the link is there - and specifically with Britain in mind it seems to be more pronounced the more developed the economy - perhaps because after a certain level of prosperity people really can choose to work less if tax is too high.

The second killer point is that the real cost of high taxation is invisible because it is the work foregone - the economic growth lost for ever because people do not make the extra effort.

Any deceleration makes a huge difference, for as Leach shows even the smallest change in annual growth rates can have a major impact when compounded over two or three decades.

In 2002 gross domestic product per head in the UK was £17,600. With 2% growth over the next 25 years this will rise to £28,900. If growth is 1% higher at 3%, real per capita income will rise to £37,200.

It is a good paper but the sadness is that it has had to be written at all. The experience of the past 20 years should have drilled the case for low taxation into the minds of politicians everywhere.

It speaks volumes about the voters' ability to forget and the politicians' ability never to learn that 20 years on from Laffer's pioneering work into the destructive effect of excessive taxation the case is having to be made afresh.

I don't believe it

I LIKE the people who run Lastminute.com and the way they have coped with the collapse of technology stocks and hung in there to build their business is impressive.

Others have clearly also been impressed because the company's shares have doubled and re-doubled since their low. At this rate there is a danger not only that the group will make a serious pre-tax profit after deducting nasty stuff, but also that the shares might one day get back to the price at which they were floated on the stock market.

It is time, therefore, for a reality check. The day Lastminute.com was floated it was valued at something over £800m , which as I said at the time made it worth rather more than WH Smith, Arcadia and several other retailers combined, and frankly I did not believe it.

Today it is once again worth more than £800m - having issued shares for acquisitions in the meantime. That puts it on almost level pegging again with WH Smith or Matalan and substantially ahead of Woolworths at £650m or Selfridges. Its valuation on the stock market is also more than the combined totals of Majestic, Monsoon and Mothercare, or Big Food Group, Blacks and Body Shop.

Before the hype for Lastminute gets out of hand again - and I see that another big bank has just resumed coverage of the shares - let me put on record once again that I don't believe it.