Flat out
September 11th, 2005The latest fad amongst the British blogosphere seems to be talking about the “flat tax” - i.e. just one rate of tax which we all pay.
Aside - I never chipped in on the fad that was bouncing round a couple of weeks ago, namely “what does it mean to be British?”, post-July 7. The predominant opinion was that being British consisted purely of virtuous values, which is a fallacy. A national character, just like any other character, has its flaws. A debate on what being British means is meaningless, unless we consider binge drinking, snobbery, mild xenophobia, imperalistic tendencies etc. as well as all the good things.
Right, back on track. First things first, it isn’t really a totally flat tax. By setting a higher personal allowance (A) it effectively is a dual tax rate system - 0% (for incomes below £A)and n% (for incomes above). The problem is, we can’t agree what A and n should be.
This Adam Smith institute paper (PDF) suggests an allowance of £12,000 and a rate of 22% - but this would also severely slash initial revenues (between £42bn and £63bn, according to the ASI’s own figures). Even if, as the ASI suggest, removing most forms of tax relief (including the blind person’s allowance, but not those for businesses), there’s still a shortfall - the only way the government could possibly maintain revenue levels would be to trust in every supply-side economist’s favourite friend - the Laffer curve - namely that the increased economic activity will produce a higher tax intake overall (as expounded on in another ASI pamphlet, that really lays on a selective interpretation of statistics, particular the ones on the Reagan tax cuts). Whether the Laffer curve works is a topic of some debate (pro, anti) and in any case, is its shape or form really constant and unaffected by structural changes, especially for a system as complex as an economy? There is no guarantee that it is a simple mechanism that works - to do so would be to naively believe that there really is such a thing as a free lunch.
Meanwhile, a more progressive take, such as this one, which states a £10,400 allowance and rate of 55% - it’s slightly revenue-positive while remaining highly progressive. But, the rate is two and a half times what the ASI propose, which would probably make them choke on their port and cigars*. To try and claim that there are a group of people in favour of a flat tax, when they have vastly differing ideas of how it should be levied and for what ends, vastly over-represents one’s claim to having support.
The right’s argument for flat taxes depends on two things. The first is that as our tax system is currently highly complicated and full of allowances and loopholes, which makes it easier for tax avoidance, especially amongst the super-rich. Quite true in a number of cases, but this does not mean that a flat tax is the only way of plugging those holes - we can still reform the collection and exemption system without adopting different levels of rates and allowances.
The other is the constant assertion that this is not merely a way of reducing the tax burden on the rich. According to this line, the very wealthy avoid tax so much because of high rates and opportunities for (legal) avoidance - by getting rid of both, not only will they stop avoidance, but actually pay more in tax, in absolute terms. This, of course, is bollocks - rich people avoid paying tax because they hate paying tax, like the rest of us. Unlike the rest of us, they are rich enough to employ accountants who help them avoid it. Slashing their tax rate by nearly half is not going to turn them magically into happy, wilful taxpayers overnight. It’s just going to make them richer, at the expense of middle-income earners. And I can’t see how the exchequer will get its money back - the super rich’s gross income would have to nearly double in order to produce the necessary returns.
If the flat taxers really cared about reducing the tax burden on the poor, or reducing the cost of tax administration, then they’d have their knives out for VAT, which is both regressive and a bureaucrat’s wet dream. As for those on the left, looking at it in terms of redistribution: forget about it. The bigger problem in the country is not inequality of income (which, remarkably, has remained pretty constant these past few years), but inequality of wealth (which is shooting up) - something that income tax alone cannot tackle.
* Sorry, I couldn’t come up with a modern right-wing equivalent of lentil/muesli/bruschetta, or whatever foodstuff Guardian readers supposedly eat. Any suggestions?
September 12th, 2005 at 00:41:44
According to Tim Worstall (who should know) the ASI’s proposed allowance is £12,000 per household; they clearly want to reduce the overall tax take, but the 22% rate is the main driver. I quite like the idea of a £10,000 / 50% system myself, but good luck getting the small-government crowd behind that one.
rich people avoid paying tax because they hate paying tax, like the rest of us. Unlike the rest of us, they are rich enough to employ accountants who help them avoid it. Slashing their tax rate by nearly half is not going to turn them magically into happy, wilful taxpayers overnight.
I made this point, to general indifference, over on Owen Barder’s blog; Owen’s angle seems to be “no but we’ll tax that too”, which I think sadly underestimates the ingenuity of accountants. The nearest thing to a persuasive argument for flat tax (that I’ve seen) is “the tax system needs reform, this is a popular reform and we could get the reforms the system really needs through on the back of it” - and even that’s not very persuasive.
Irrelevantly, do you fancy putting something down about the Lewis Hyde book? I’d never heard of it or him, & it sounds fascinating.
September 12th, 2005 at 01:56:12
As for those on the left, looking at it in terms of redistribution: forget about it. The bigger problem in the country is not inequality of income (which, remarkably, has remained pretty constant these past few years), but inequality of wealth (which is shooting up) - something that income tax alone cannot tackle.
This is not true if you count inheritances as income.
September 12th, 2005 at 09:34:59
By income tax I mean tax on earned income (as the govt. defines it), not unearned income such as inheritance, capital gains etc., and the flat tax proposals do little to broach that particular subject. Another left-wing take on the tax does go as far as redefining income to mean all forms of money earned, which is an interesting take. However, I’d tax inheritance at a separate, much higher rate than income from labour or capital gains, simply because it is the most unfair form of wealth transfer, requiring nothing more than pure dumb luck on behalf of the recipient.
September 12th, 2005 at 21:55:32
The link you give for an argument against the laffer curve appears to me to be an argument for it.
My (economically illiterate) understanding of the Laffer curve is that it is largely unarguable. With a tax rate of zero the tax take is zero. With a tax rate of 100% the tax take is zero (nobody will work). In between these two points there must be a maximum. That’s all it says.
The result of this is that if you reduce tax rates you may increase the tax take. But it depends where you are on the curve.
So when you ask whether its shape or form is constant the answer is obviously no. But the point is that you are just as likely to reduce the tax take by raising rates as by lowering them. It will not definitely work. But equally leaving things the same will not necessarily work. Making things more complex or raising rates will not necessarily work. What we can say is that making things simpler will definitely reduce compliance costs. It will reduce the incentive to avoid or evade tax by employing accountants. It will increase incentives to risk taking.