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		We don't have to choose between lower taxes and better public services Lincolnshire Echo - December 16 2004 So often in politics, things that are obvious turn out to be wrong. Millions of people swallowed Karl Marx's idea that wise governments could run national economies better than the market, yet central planning turned out to be a disaster in practice, and everyone now agrees that free markets work better. It is "obvious" that the way to eliminate world poverty is for rich countries to transfer wealth to poor countries. Yet too often our aid money ends up buying arms, or in the Swiss bank accounts of the governing classes, and the poor remain poor. Many economists now agree that trade is a more reliable means to alleviate poverty than aid -- which is one of the reasons why the EU's Common Agricultural Policy is such a scandal. It denies access to Western markets for third world farmers, and worse still, it dumps subsidised food in poor countries, undermining their own agriculture. Let's look at another "obvious" fact. If the government raises tax rates, it will collect more money to spend on schools and hospitals, right? Actually, no. Wrong. Let me give you some stunning numbers that I heard at a recent seminar in Brussels. Germany has a corporate tax rate of 40%, and corporate taxes amount in total to 0.7% of GDP. Slovakia, a new EU accession state, has less than half the rate -- 19% -- yet raises three times as much, 2.2% of GDP. And Ireland, with the lowest rate in the EU of 12.5%, raises 3%. These are not isolated examples, chosen to make a point. Generally speaking, high rates of tax mean a lower tax take. How can this be? There are a number of factors. First, lower tax rates, coupled with much simpler tax structures and the elimination of allowances and exceptions, mean there is less incentive, and less opportunity, for tax avoidance. Second (and the evidence proves it), lower tax rates lead to higher economic growth, and therefore a bigger tax base. Lower taxes make entrepreneurship more attractive. Third, lower tax rates also attract more inward investment. Indeed tax rates are likely to be forced down in "old" EU countries like Austria and Germany, as investors move to lower-tax régimes in, for example, Slovakia. This is why the Finance Ministers of the "old" EU countries keep complaining about "unfair tax competition", and trying to outlaw it. But tax competition is a thoroughly good thing. Attempts at tax harmonisation are a cartel designed by governments against the interests of tax-payers. If low corporate tax rates, counter-intuitively, deliver more money to the Exchequer, what about personal taxes? Exactly the same seems to be true. Countries that lower taxes often see increases in revenue, and for similar reasons. And low-tax economies grow faster than high-tax economies. Better still, low flat-rate taxes generate higher growth, and more jobs and prosperity, than progressive tax régimes. Here in the UK, rates start at 10%, and rise to 40%. But Slovakia (for example) has just introduced a flat-rate tax at 19%. And apart from a tax-free personal allowance set at 50% of the average wage, they have very few allowances. Of course the socialists argue that flat tax is unfair. Why shouldn't those on higher incomes pay a higher rate of tax? First of all, because it doesn't work. Back in the seventies we had marginal income tax rates in the UK approaching 100% -- and we were the "sick man of Europe". Second, because it isn't really fair. Sure, people who earn twice as much should pay twice as much -- but why should they pay four times as much? Under a flat tax régime, high earners have more money in their pockets. But they recycle the money. They spend it, paying VAT and creating jobs in services and manufacturing. They may also give more to charity, as happens in the USA. Above all, they accumulate capital which promotes investment, growth and jobs. If you want equality of outcomes, with equal distribution of misery, then progressive taxes are fine. But if you want equality of opportunity, linked to growth, wealth, jobs and prosperity, go for a flat tax. Labour say that Tory plans for lower tax rates mean fewer schools and hospitals. But the truth is that lower rates mean higher growth, more revenue, and better public services. From the Tory team in Brussels, I should like to wish 'Echo' readers a very merry Christmas and a peaceful and prosperous New Year.