To tax or not to tax

The mainstream political debate over taxation has always been heavily divided but it has never been so counter-productive.

On the right wing, higher taxes have generally been viewed as a burden on productive members of society, providing disincentives to work for individuals and businesses.

On the left wing, higher taxes are seen as a necessary way to raise money to help those most in need and to balance the government's finances.

At the current stage of the economic cycle, higher taxes have become very difficult to justify, giving the upper hand in the debate to those on the right.

It has never been easier to argue in favour of lower taxes, which are necessary to ensure the economy does not deteriorate any further.

However, the victory for the right in this debate has not come without a price: higher budget deficits.

If a choice were offered between higher taxes and higher budget deficits, the right wing would prefer the latter. The left wing will always aim to reduce the budget deficit before reducing taxes.

As unpopular as this may seem, in the long run it does offer the most sustainable way of running the public finances; this helps to explain the swing in political preference among the voting public over time.

During good times, when the public finances are in good shape, a right wing government will always opt for lower taxes, but when the economy is weak, a higher deficit makes it impossible to cut taxes, leading to an even sharper slowdown.

This helps to explain why the Obama administration has inhereted a massive budget deficit and a sharp economic slowdown with little options for cutting taxes when the economy is at its most weak.

In reponse, the right wing has responded by calling for lower budget deficits before lower taxes. Today's comments by British Conservative MP Ken Clarke are also indicative of this shift in tone. Of course, this type of suggestion would be most helpful during good times and not in the middle of a recession.

As always, the political debate is behind the curve and in this case, will not help make lower taxes part of the solution, which inevitably they will need to be.