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Comments on: The left and flat taxes http://sharpener.johnband.org/2005/09/the-left-and-flat-taxes/ Trying to make a point Fri, 25 Jan 2008 12:21:35 +0000 hourly 1 By: Neil Harding http://sharpener.johnband.org/2005/09/the-left-and-flat-taxes/#comment-3215 Sun, 25 Sep 2005 02:15:20 +0000 http://www.thesharpener.net/?p=132#comment-3215 The tax system is far too complex, I’m not sure what the government are playing at. Maybe they are in league with the accountancy firms (who are some of our biggest export earners) by providing them with such a massive domestic market (the US tax system is similarly complex).

So a few of you right wingers on here might be surprised to hear that a flat tax ‘could’ be alright with me as long as a few privisos are catered for. I am completely in favour of the increased efficiency by doing away with bureaucrats, accountants, etc.

In this debate the thing that matters for me is what are each income percentile of people paying in tax. At the moment the tax system has become quite regressive.

However, where the flat tax advocates like the ASI are being disingenuous is that their proposed system of a £12,000 allowance would move a lot of the burden of tax from the poor to middle income earners while high earners would see some of their tax burden moved to middle earners as well.

The obvious problem with this is; although in theory we can set whatever tax rate we like, middle income earners are going to be far less supportive of public services than low income earners who benefit far more from this provision.

This would mean that the level of flat tax is unlikely to be set at a level which would recoup the lost revenue, thereby leading to cuts in public expenditure. This to me seems to be the real agenda of the ASI, rather than any concern about the poor.

So this is why a flat tax (which would undoubtedly be more efficient) needs to be coupled with a full citizen’s income, which would do for the benefits system what the flat tax does for the tax system, i.e. cut bureaucrats.

In a fairly wealthy country like the UK, we need as our starting point to say that no-one should be without basic provision of food, energy, and shelter. This is easily affordable and is indeed the effective situation of our at present overly complicated and inefficient welfare state.

So lets pay a citizens income to everyone to cover these basic costs. As a universal payment it will be efficient and also remove the financial disincentives to work of the poverty trap.

Indeed if this was done, I would go even further than the flat taxers and state that we should aim to move away from taxing things we want to encourage, like income and profit, and move taxation onto polluters and other practises we want to discourage. As long as the regressive nature of this was compensated with a high enough citizens income it would be fine.

As for the concern about the few who would abuse a citizens income, the facts are that these people still have to be fed and housed under our present system and it is costing us more whether through welfare or added crime.

Under a CI, the vast majority would still want to work to better themselves (especially as they would be free of disincentive of the poverty trap).

Of course, this is such a massive change that pilot studies would have to be carried out to iron out problems and of course the system would have to be implemented in stages over many years. Apart from that I think the efficiency savings would mean win-win for everyone.

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By: Tom http://sharpener.johnband.org/2005/09/the-left-and-flat-taxes/#comment-3180 Thu, 22 Sep 2005 05:52:31 +0000 http://www.thesharpener.net/?p=132#comment-3180 I live in Hong Kong, where we have a flat tax on incomes of 16%.

I’m afraid Jarndyce has an idealistic view of flat taxes.

Here people complain that that taxes hit people in the middle unfairly – and this is true, they do.

The tax system here is seen a gift to the rich. It is.

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By: Andrew Bartlett http://sharpener.johnband.org/2005/09/the-left-and-flat-taxes/#comment-3154 Mon, 19 Sep 2005 11:37:02 +0000 http://www.thesharpener.net/?p=132#comment-3154 “These aren’t tax evading criminals to be hunted down, as Johann Hari implies, but economic agents taking rational advantage of the unnecessary web of complexity. While confusion, and tax codes long enough to fill a small library, remain, the rich will thrive while staying on the right side of legality.”

No. I think that they are ‘to be hunted down’. I understand what they do is legal, but criminals who do not get caught or who are not succesfully prosecuted are also ‘on the right side of legality’.

Step one in hunting them down should be the closure of loopholes and the like. I fail to see why flat-tax will help in this.

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By: Red Deathy http://sharpener.johnband.org/2005/09/the-left-and-flat-taxes/#comment-3141 Wed, 14 Sep 2005 16:19:50 +0000 http://www.thesharpener.net/?p=132#comment-3141 Just to add the Socialist view of tax – which is that Socialists agree with Adam Smith on this one, the burden of taxation can’t and doesn’t fall on the waged/salaried class. We sell our ability to work for a definite price, this price is our real take home pay, a standard of lving that continues our ability and willingness to work. If that real take home pay is cut by taxes, then either through go slows, walking off the job, changing jobs or strikes, we push nominal wages back up to restore the real take home wage.

If a tax hike did cut our real wages, that would only be because the market allowed it, and the state is takjing money our employers could have grabbed from us instead.

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By: dsquared http://sharpener.johnband.org/2005/09/the-left-and-flat-taxes/#comment-3139 Wed, 14 Sep 2005 14:46:24 +0000 http://www.thesharpener.net/?p=132#comment-3139 all completely legal (like the recent “film investment” one).

if you mean the one that a firm called “W*******k Consulting” was punting round the City with rather aggressive cold-calling, it was tits up the last I heard.

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By: Jarndyce http://sharpener.johnband.org/2005/09/the-left-and-flat-taxes/#comment-3137 Wed, 14 Sep 2005 07:49:54 +0000 http://www.thesharpener.net/?p=132#comment-3137 DD: well, it’s not completely separate the way I see it. A nightmarishly complex system will always have loopholes, big ones. People that I know earning big money (emphatically not me, unfortunately) all have avoidance wheezes, all completely legal (like the recent “film investment” one). Not that I’m against GAAR, from what I hear of it. Buit it sure ain’t going to make the system simpler for the rest of us.

Matt: first up, you’re introducing complexity straight away, so other exemptions (exploitable ones, e.g. exempt charity donations, trusts and so on) are easy to justify, and will therefore breed (hysteresis again). I think the whole package would be much simpler to sell as a flat tax, and would be best chance to get the tax base (esp. on capital gains of all sorts) widened without “they’re raising taxes!” screams from the opposition. Having said that, I’m not ideologically wedded to it, and other ideas also appeal. My support is purely practical: how to get the most money out, in the most efficient way. I should just add that like the ASI I’m not averse to a bit of expenditure cutting myself, not being convinced that most of what the state does benefits the poor at all, but I agree discussing tax reform in a non-revenue-neutral way is dishonest.

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By: Matt Daws http://sharpener.johnband.org/2005/09/the-left-and-flat-taxes/#comment-3136 Tue, 13 Sep 2005 22:54:51 +0000 http://www.thesharpener.net/?p=132#comment-3136 To pick up on a theme D^2 started: why does a “flat tax” have to be soooo simple. Why couldn’t we have, say, three tax rates: a low rate, a middle rate, and a high rate. The main appeal of the flat tax system is that it is simplicity itself: you pay a fixed % of what you earn over a certain threashold. But for this to work, there needs to be no ifs and buts, and the IR has to be able to accurately judge your income (this is a point which someone needs to look at: what precisely will count as “income”?) So, given that data, why not have a very simple progressive system? This would seem be absolutely no harder to regulate, and would seem to have all the benefits. The “downside” is that the rich get taxed more, but so what? I’m not even going to entertain a proposal which isn’t revenue-neutral, so if someone still has to pay, why not make it the rich and not the middle classes?

However, I am warming to the idea. I strongly believe that something needs to be done about the tax code.

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By: dsquared http://sharpener.johnband.org/2005/09/the-left-and-flat-taxes/#comment-3135 Tue, 13 Sep 2005 22:08:47 +0000 http://www.thesharpener.net/?p=132#comment-3135 Jarndyce, the closing-loopholes debate is entirely separable; it’s the debate over a GAAR (General Anti-Avoidance Rule). This is a piece of legislation, actually in operation in Canada and which to my certain first-hand (by which I mean second-hand; someone who was actually involved with it told me, which counts as first-hand in the blogosphere) knowledge has been seriously considered by Gordon Brown, which allows the Revenue, subject to judicial review, to rule that a particular set of arrangements is an avoidance scheme and to invalidate it and reverse its tax consequences. So you could set up your offshore trust arrangement, and by fiat, a Commissioner of HM Inland Revenue could find that it had no purpose other than to serve as an avoidance device and bring it back onshore.

It’s as controversial as hell (because it’s a massive extension of the already existing ability of the tax authorities to make retrospective legislation, with real difficulties in ensuring checks and balances, albeit that the sky over Canada has not yet fallen in) but it is a real runner in terms of closing loopholes and has at least as much legislative momentum behind it as flat tax. If I were a cynic, which I am, I would suggest that framing and hysteresis matter a hell of a lot, which is why the ASI has got behind flat tax in order to head off GAAR.

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By: Jarndyce http://sharpener.johnband.org/2005/09/the-left-and-flat-taxes/#comment-3134 Tue, 13 Sep 2005 21:55:00 +0000 http://www.thesharpener.net/?p=132#comment-3134 In a flat tax system, the marginal rate is all that matters

That’s not true, though. The allowance matters, too, especially at lower income levels, which are all that really interest me. It determines the extent to which the tax will operate progressively, for a start. As you say, the real tax loophole action is offshore, and only available to the very rich. Any lefties who dream of snaffling 40% of Sean Connery’s income to pay for a hospital is in a dreamworld. However, numbers of people at that level are very small; far more economically damaging are the wheezes for 50k+ earners. I don’t agree that closing these can be separated from flat tax talk, because flat taxation makes closing them actually possible and not just tax-the-rich rhetoric, for the reasons I laid out in the piece I linked (hysteresis, framing). I guess that partly addresses your thoughts, too, rogergathman. (BTW, in the US case, you could more fruitfully get back on track by reintroducing the Inheritance Tax. Scrapping that is about the most regressive tax policy possible, ensuring not just current injustice and inequality, but that it “cascades through the generations”.)

The marginal rate of 91.5% up there is a result of housing benefit and working families tax credit

Yes, partly, and there’s definitely a problem there, too. But removing taxation to low earners can improve that to around 70-ish. That’s significant. And I’m not overly fixated on marginal rates, but it’s pretty obvious that working 30 hours a week for an effective wage of a pound or two an hour isn’t going to happen. I’ve never met anyone on benefit (and I’ve known and know plenty) that isn’t acutely aware of the exact implications of every hours or ten of work they do, or at least declare. Anecdotal, I know, but in my experience incentives at the margin are real.

For a bit more flesh on the bones, specifically on expanding the base rather than the marginal rate, I recommend this from Owen, too.

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By: rogergathman http://sharpener.johnband.org/2005/09/the-left-and-flat-taxes/#comment-3133 Tue, 13 Sep 2005 21:11:17 +0000 http://www.thesharpener.net/?p=132#comment-3133 From an American perspective.

The interesting thing about the flat tax rate in America is that it relies on a rightwing version of wish logic that the right is keen to criticize when they see it in, for instance, left proposals to cap prices.

Simply put, taxes are set, in democracies, by legislatures who are engaged in a semi-market for their services. In order to continue as legislators, they rely on receiving money from private sources. And in return, they give these private sources, among other things, various tax breaks. A good example of this was the latest energy bill, signed by Bush, which gave 8.1 billion dollars in tax breaks to refiners.

Now here is what the flat taxers want us to believe: that we can freeze the propensity of the legislature to give tax breaks by decreeing a flat tax. Somehow, the market motives that have driven tax legislation for the last two hundred years will simply be abolished. This is seriously proposed by the same people who tell us that, on the other hand, we can’t trust congress to pay its ious to Fica.

Logically, this is the equivalent of freezing prices in the market in, say, gasoline. The latter posits freezing supply and demand at a certain arbitrarily chosen point. The former posits freezing a service at a certain arbitrarily chosen point (that service being using the government to make money for a rivalrous group of rich people and of corporations).

As the righties often point out, the consequence of price freezes is the creation of a black market and the petrifying of the creative side of competition. Similarly, the creation of a flat tax would only mean the formation of a new species of tax breaks for corporations and the wealthy, named something else.

In reality, there is no freezing these markets.
What the left should really be for is simply returning to pre-Reagan rates on incomes in the top 10 percent bracket. This is not only a good revenue raiser, but it takes the air out of the motive to increase upper management compensation packages exponentially — since the surplus will simply be collected by the government. The less tax is collected on the upper percentiles, the more income inequality increases as the comparison in the percentage of compensation raises in private industry between regular workers and the upper management. Tax policy has this double whammy.

Much higher taxation rates for the rich are the first step in bringing wealth inequality back to its 70s levels in the U.S.

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