A GROUP of leading economists will today write to Gordon Brown, urging him to follow the example of America’s Treasury and test whether tax rates can be cut without hitting tax revenues.

The chancellor has often expressed his admiration for the American model and the economists are telling him, in effect, to put his money where his mouth is.

So-called supply-side economists have long argued that cutting tax rates can, paradoxically, boost government revenues because they improve incentives, boost economic activity, lead to more businesses being created and reduce avoidance. The most famous proponent was Arthur Laffer.

In February the US Treasury announced it was to spend $500,000 (£275,000) a year on a new “dynamic analysis” division, to test whether lowering tax rates could be achieved in a revenue-neutral or revenue-raising way.

“We believe such a dynamic model would provide a more accurate analysis than the ‘static model’ currently run by the Treasury — a model which assumes that any cut in taxation leads to an equivalent fall in revenue, which necessitates an equivalent cut in spending,” the economists say in their letter.

“As recent examples such as Ireland have shown — where the government has significantly reduced corporation tax — reducing taxation can lead to higher revenues by simulating economic growth.”

The 42 economists, assembled by the Taxpayers’ Alliance, include Deepak Lal of the University of California, Forrest Capie of the Cass Business School, Patrick Minford of the Cardiff Business School and Lord Blackwell, head of the Downing Street policy unit under the Conservatives.

Douglas McWilliams, chief executive of the Centre for Economic and Business Research and another signatory, said: “Other countries are examining how they can have tax regimes that will make them more competitive.

“If the Treasury created a dynamic-analysis division to help with their economic modelling we believe that they would learn a lot about the benefits of a low-tax regime for the UK.”

The most famous example in Britain was when the Tories cut the top rate of income tax from 83% first to 60% and then 40%. The effect was to boost overall revenues from higher-rate taxpayers and increase the share of income tax paid by them.

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