Fysh swims against the tide

Image by Anthea Bareham

Yeovil MP Marcus Fysh is clearly not afraid of adopting controversial positions. Last Christmas, for example, he was widely criticised for comparing the idea of vaccine passports to living in Nazi Germany. In June 2020 he was ordered to apologise for “patronising conduct” towards the Parliamentary Standards Commissioner. Now, in comments that say more about his self-confidence than his common sense, he has argued that Liz Truss should not have reversed the proposed cut in the top rate of income tax from 45 per cent to 40 per cent.

It’s no small matter for an MP to speak out against their leader on a high-profile matter of public policy. It is something else entirely, however, to claim to know better than the PM and Chancellor, virtually every serious academic economist, and the collective view of the finance sector – shown through negative movements in the currency and bond markets. It would seem that this Fysh is seriously out of its depth.

Writing in a local paper, Fysh claimed “I have no doubt that this [tax cut] would have sucked capital and talent in from overseas and ended up with HMRC collecting far more in tax.” It’s a view widely shared by the right wing think tanks that are encouraging Truss and Kwarteng in their reckless approach to the public finances. It owes more to wishful thinking than empirical evidence.

Those who believe that tax cuts will bring in more tax, quote something called the “Laffer curve” – a theory developed by a US economist called Arthur Laffer. It postulates that starting from a tax rate of zero, increasing tax rates will increase government income up to a point where any further increase is offset by an even bigger decrease in effort or investment. At a rate of 100% no one would work, and the tax yield would be zero.

It sounds plausible, yet the theory gives no idea where the tipping point might be. Moreover, the available evidence suggests that it is nowhere near the rates of tax currently in place or under discussion. Studies in the USA have shown that the cuts introduced by the Bush administration had negligible impact on growth and merely made the rich richer. Cuts in corporation tax had little impact on investment.

Fysh quotes the example of the tax cuts implemented by George Osborne, which were said to have increased revenue to the exchequer. That was certainly true in the first year. What happened, however, was that once it was announced that tax rates would be lower in the following year, high earners chose to defer some of their income. Far from generating more for the government, the overall effect was a loss of revenue.

The tax cuts proposed by Truss & Kwarteng not only crashed the pound but were electorally unpopular. According to researchers at UCL “people were not keen on cuts to corporation tax, alcohol and tobacco duties, and the higher and additional rates of personal income tax.” This was true for both Conservative as well as Labour voters and may have encouraged the government, if not Mr Fysh, to retreat.

For a politician to be unpopular but right is brave. To be unpopular and wrong is suicidal. Marcus Fysh, blithely swimming against the tide, is likely to find himself high and dry after the next election.