Dr. Tom McDonnell:

Politicians are not rational, indeed, but tax rates matter at the bottom because of the interaction in terms of take-home pay. One area where one could consider cutting taxes is by moving to the American model of refundable tax credits, for example. That is effectively an in-work benefit. By moving to that model, one essentially increases the incentive for low-paid workers to work additional hours. That is likely to increase employment rates and work intensity at the bottom in terms of the income scale. At that expensive margin, taxes and take-home pay matter but it is rare - certainly at the half of income rates we are talking about - that somebody on a marginal rate will work fewer hours because of that. Show me the evidence; it is just not there.

Tax rates used to be much higher throughout the OECD. The golden age of capitalism was 1945 to 1973 when marginal tax rates were never higher. Marginal tax rates were over 90% in the United States. I am not advocating that as a policy but I am pointing out that there is no - I will be happy to direct attention to the some of the research on this - empirical evidence in terms of meta-analysis, that is, studies of studies and bringing them all together, that marginal tax rates reduce long-run economic growth. That is not where the focus should be if one is interested in inculcating GDP growth over the long term but it is on infrastructure, child care, things like refundable tax credits and education spend, particularly for early years and fourth level. Building up our national innovation system means increasing the research and development budget, which means increasing linkages between universities and employer groups, are the areas that one needs to focus on, while tapering up welfare benefits, for example, and being an extremely open economy that encourages migrants in. The evidence, even in the UK, is that they tend to be net contributors to the budget, so their decision is something that we could perhaps benefit from.

Reducing income taxes when our revenue to GDP ratio is already low is unwise and not conducive to good policy in the long run.