Lord Saatchi has come up with an excellent idea to change and improve the tax system. Let's do away with corporation and capital gains taxes with regard to small companies. The only problem with the idea is that it's just not adventurous enough.

In a report to celebrate the 40th anniversary of the think-tank, which was founded by Baroness Thatcher, the CPS calls on the Government to stop imposing corporation tax on firms with fewer than 50 employees. Capital gains tax should also be abolished for all investors in small companies, the report states. Lord Saatchi writes that the policy would show “how the awesome power of taxation can be used to the benefit of everyone”.

He makes the correct and obvious points that small companies are just about the only creators of new jobs in the private sector and that this would do much to increase their creation. The obvious side effect of that being that fuller employment will lead to higher wages: as long as they're being earned something we all generally regard as being a good thing.

But as we say this isn't quite adventurous enough. For optimal taxation theory tells us that we shouldn't be taxing corporations nor the returns to capital at all. For such taxes have higher deadweight costs than the taxation of incomes, which is again higher than taxing consumption which is again worse in its effects than repeated taxation of property. We should thus, in order to have the least lost economic activity from whatever level of taxation we desire to have, abolish corporation and capital gains tax in their entirety and replace the revenue with something like a land value tax.

Yes, it would produce political caterwauling but it would be the most efficient method of gathering tax revenue.

On a related point one way of looking at Piketty's magnum opus is that it's an attempt at a refutation of that optimal taxation theory. Everyone does agree (OK, some economists you have to press on the issue but it is agreed to in the end) that the deadweight costs are higher and that thus such capital and corporate taxation is inefficient. And that abolishing them and moving to other revenue sources would make us all richer. But there's an awful lot of people who just wouldn't be happy with such a system. So, they're looking for some other reason, other than efficiency, to insist on retaining such taxes. And inequality seems to be the current one they're trying out. It's not an argument that really works though.