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‘Liz Truss’s tax cuts would have worked wonderfully for Britain’

US President Donald Trump presents the Presidential Medal of Freedom to Arthur Laffer
Arthur Laffer, former adviser to Ronald Reagan, was an economic adviser to Donald Trump’s 2016 election campaign

Britain faces “destitution” if Chancellor Jeremy Hunt does not cut taxes, one of America’s most prominent economists has warned.

Arthur Laffer, known for his Laffer Curve tax theory and a former adviser to two US presidents, said Mr Hunt will cripple the UK economy if he does not take steps to reduce Britain’s tax burden.

In an interview with The Telegraph, Mr Laffer said: “You’ll be reversing back to the days of destitution in Britain, if you could continue to have those high tax rates.”

Britain’s tax burden is on track to become larger than at any time since the Second World War, according to forecasts from the Government’s fiscal watchdog.

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The burden is rising because income tax thresholds have been frozen until 2028. It means millions of people will be dragged into higher tax brackets as their salaries rise, an effect known as fiscal drag.

Mr Laffer, 83, said a failure to reduce the burden would return Britain to the 1970s when the country was forced into a bailout by the International Monetary Fund (IMF). Then, Britain was crippled by runaway inflation and low growth, sparking a run on the pound. The highest income tax rate at the time stood at 83pc.

Mr Laffer said: “If you keep raising the highest rate and have more inflation and don’t index the tax [thresholds], you will be moving back towards those days pre-Thatcher.”

He urged the Chancellor to use his upcoming Budget to scrap the top rate of income tax, arguing it would “be a very major benefit to the country.”

Fiscal drag means an extra three million people will be paying the higher rate of tax by the end of the decade, while an additional 400,000 will be forced to pay the top rate charged at 45pc on earnings above £125,141.

Mr Laffer said the rise in the number of people paying the top rate would be the biggest barrier to economic growth.

He said: “The top rate is far more important for the economy than cutting lower rates. It is much more important.”

Mr Laffer is known as the modern father of supply-side economics – the theory that the best way to achieve economic growth is through low taxes, low regulation and free trade.

The root of his fame began with a napkin in 1974. Then, America was mired in “stagflation”, or the toxic combination of inflation and stagnant growth. In a meeting with several advisers to President Gerald Ford at the Two Continents restaurant in Washington, Mr Laffer made a rudimentary sketch of what became known as the Laffer Curve – an illustration of the relationship between tax rates and government revenues.

It visualises the idea that high taxes can be self-defeating. The curve shows that, initially, rising tax rates boosts government income. But at a certain point, as the rates get higher, the returns start to diminish. This is because high taxes begin to trigger behavioural changes: wealthy individuals move abroad, or pay more into their pensions; businesses decide not to invest.

“What do these rich people do? When you raise the tax rate on them, they change their behaviour. They hire lawyers, they hire accountants. They hire deferred income specialists. They hire business planners, they hire lobbyists,” Mr Laffer said.

The concept long pre-dated Mr Laffer. The 14th century Arab philosopher Ibn Khaldun, Scottish Enlightenment economist Adam Smith and John Maynard Keynes had all expressed similar arguments.

Arthur Laffer pictured with Ronald Reagan
Arthur Laffer was an adviser to Ronald Reagan in the 1980s - Bettmann

However, it was Mr Laffer who fired the idea into Republican ideology. After the napkin, the Republicans became the party of tax cuts. Mr Laffer went on to serve as a member of President Ronald Reagan’s Economic Policy Advisory Board in the 1980s. In 2016, he was an economic adviser to Donald Trump’s election campaign.

The theory remains relevant. In December, the Scottish National Party announced plans to raise the top rate of Scottish income tax from 47pc to 48pc. In theory, this should bring in an extra £53m in tax revenues, according to the Scottish Fiscal Commission (SFC). In practice, the watchdog expects so much behavioural change that the gain for the Scottish taxman will in fact only be £8m.

Mr Laffer’s proposal to scrap the top rate of tax in Britain is unlikely to land well at the Treasury, given the ill-fated September 2022 mini-Budget. Then prime minister Liz Truss and chancellor Kwasi Kwarteng announced plans to, among other things, abolish the UK’s 45pc top tax rate.

It was billed as “the Growth Plan” but imploded spectacularly. Mr Kwarteng was sacked and Ms Truss was forced to reverse course days later after markets effectively exploded. Gilt yields soared as investors lost confidence in Britain, betting that the unfunded tax cuts would drive up inflation and government debt. Ms Truss’s premiership lasted only a few weeks longer.

Mr Laffer is adamant that Ms Truss’s mini-Budget was the right approach, however poorly executed the plan was.

“It was an excellent thing,” he said. “The thing that was not excellent was that it didn’t get implemented. It’s amazing how tax cuts don’t work until they’re actually put into effect. If it had been tested, it would have worked wonderfully for Britain.”

Other economists may disagree but nobody can deny that the British economy needs growth.

The UK tipped into a technical recession at the end of last year and, while early data suggests the downturn is already over, the outlook remains anaemic. The International Monetary Fund (IMF) expects the economy to grow by just 0.6pc this year.

The contrast with the US is stark, where the IMF has forecast 2.1pc growth in 2024.

The UK and Europe have been left scrambling to find an answer to President Joe Biden’s 2022 Inflation Reduction Act, which has injected $500bn into the economy through spending and tax breaks designed to reduce carbon emissions and improve healthcare.

Despite strong growth, Mr Laffer is critical of President Biden’s approach. He believes the President is inflating an economic bubble that will burst.

He said: “Biden doesn’t understand economics. We have been way overspending. In my view, the key to prosperity is spending restraint. Joe Biden has been the antithesis of spending restraint.

“I’m for reducing government spending and reducing tax rates and letting markets really drive the system.”

President Biden is likely to face Mr Trump in the upcoming November election and Mr Laffer said a second Trump presidency would likely see a similar economic approach to his first.

Then, Mr Trump cut the top rate of tax from 39.6pc to 37pc – a move that President Biden has proposed reversing in spending plans he released last March.

Mr Trump’s top rate tax cuts had more success than Ms Truss’s. So did Prime Minister Margaret Thatcher’s. When she came to power in 1979, the top rate was 83pc. By the end of her premiership, it was 40pc.

“That led to an extraordinary period of exceptional growth and prosperity in the UK,” Mr Laffer said.

Baroness Thatcher was a personal friend.

“She and Sir Dennis used to stay at our house in California when she came to the US,” Mr Laffer recalled. “I’ve got all of these pictures of her hugging my kids.”

Mr Laffer would have dinner with her twice a year at her home in Chester Square after her premiership.

“She wasn’t this austere piece of marble. She was a person with a personality and with feelings and humour and sadness. And she was very, very real.”

A Treasury spokesman said: “We will not speculate on whether further tax cuts will be affordable in the upcoming Budget, however our tax burden remains lower than any major European economy and inflation has more than halved.”