The left and flat taxes
It isn’t just Tories like George Osborne and free-market fundies (pdf) who are interested in flat taxes. As Phil’s recent piece shows, liberal-minded types, including lefties like me, are also keen. Okay, it isn’t an egalitarian utopia, but once we all get over the visceral reaction that a non-progressive tax system must be “unfair”, the benefits are obvious. A high tax-free allowance can help correct the ludicrous situation we’re in now, where poor families are taxed a higher share of their income than the rich. And where low-income families face marginal tax rates of 91.5%, as recent DWP data revealed. Our tax system might be tagged “progressive”, but it’s in name only. A long-broken promise.
Closing loopholes, partly by making the system simpler, should reduce escapees at the top end. 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. Making full use of every one of the 39 different tax rates on capital gains, for instance.
On top of that, flat-tax transparency makes it harder for governments to ferret tax increases away, out of sight. Plus: anyone filled out a tax return lately? All those sections and subsections, and locked-down online forms, with various reliefs and different rates of taxation… It all has to be read by someone, someone whose salary we’re paying: numbers of tax inspectors are growing at twice the rate of doctors and nurses. Who gains from this? Not ordinary punters, what used to be called the “working classes”, that’s for sure.
But Mr Osborne, coming at the issue from the Right, has at least three major challenges on his hands. The first is political: does anyone believe his party can be trusted to look after lower-income families, as he claims? It rarely has in the past. A high, headline-grabbing tax-free allowance, an immediate benefit to poorer earners, could allay these fears. As Chris explains, it will sacrifice a little efficiency, to the gain of equality, and probably saleability. That’s a gift to redistribution’s True Believers: the left.
The second is economic. Caving in too often to the inevitable pleading for special cases, reliefs and exemptions, will destroy the big advantage of a flat tax: its simplicity. Mr Osborne will need to hold firm or the project is doomed before take-off. I doubt he, or any other politician, has the spine. In the face of a wilfully idiotic press corps, it may not even be achievable, or electable.
Third, and hardest of all, he’ll need to get to work changing the mind-set of Middle England. I don’t know anyone who would be happy for Peter Mandelson to choose their bra, but the deal with the Chinese over textile imports this week has allowed just that. And hardly a disgruntled peep from the media: we Brits think the state is our friend, that it acts wisely, spends our money carefully. That it will be there when we need it. Just look across the Atlantic, at shambolic, sclerotic government on every level after Katrina: this isn’t the case. Getting to keep more of our money, especially for those of us who don’t earn much, is a good thing.
(With thanks to the Evening Standard.)
Here are some questions from a leftist perspective.
It’s entirely true that the current system is in practice regressive, the poor pay a higher proportion of their income to the treasury than the rich, and a neutral tax system would help them out. However, isn’t this an effect of taxes other than income tax? If we changed to a flat tax, and left this the same, would we neccesarily be improving their lot?
I’m still not convinced about the low-income families with children we’ve been talking about would benefit. They face high marginal tax rates because a decision has been taken to redistribute money to poor children. If we throw away the child-related allowances, they may not face high marginal tax rates, but how do we know they wouldn’t be worse off in absolute terms?
I guess I’m suspicious of the highly abstract way this is always discussed. I obviously can’t blame you for not presenting a detailed economic model of a future system. But how would children be accounted for in it?
1. Yes, partly it is due to e.g. VAT, alcohol taxes, and so on. I’d certainly support a shift in the tax burden away from indirect towards direct taxes, too. But it isn’t just that. According to National Statistics data mined by the ASI, someone earning £80k on average contributes only twice as much of their income in income tax only as someone earning under £10k. This is because the rich are always going to be better avoiders, more so when there’s a complex system to get round. Plus, our tax allowances are too low. Both would be addressed with flat tax. In absolute terms you’d be improving their lot, too: with a threshold of £10k-ish, anyone earning only that wouldn’t pay any tax at all. Immediate win.
2. Children is probably an issue for benefits, not necessarily the tax system. (I mean, you could do it with tax, but if you’re aiming for a simple flat system, that would kind of run counter to the whole point.) As I said on another thread, I prefer flat, non-withdrawn benefits anyway.
From the previous discussion on the other thread, i can see two separate issues at hand when Jarndyce mentions the 91.5% marginal rate.
The first is the tax system.
The second is the benefits system.
The 91.5% marginal rate results from their interaction.
The citizen’s income that we were discussing is a replacement for the benefits system.
The flat tax is to do with the tax system and thus, to me, conceptually seprate. We could have progressive taxes & a citizens income – if there is the political will. Or flat taxes and a means-tested benefits system. One doesn’t imply the other.
I don’t understand tax. Because of this, the government has lost out on tax revenue from me (I won’t go into details just in case) which I would have been happy to declare and pay were I to understand the system.
Because of me and people like me, they need to fork out more tax revenue on tax inspectors who, when they discover that I should have paid more tax than I have, will have to spend even more tax revenue on working out precisely how much tax I owe – and the amount I (probably) owe wouldn’t cover the expense of investigating.
Of course, I’m also still owed tax rebates from my student days (a fair number of years ago) when I was earning less than four grand a year but getting taxed to fuck. The extra few hundred quid would, shall we say, have been
wasted on boozevery useful while an impoverished student.GL: Maybe not, but it’s a good chance for some bipartisanship – my guess is that the Tories would concede CBI if your lot conceded flat tax.
Andrew, although some on the left are keen on a Citizen’s Income, i am not [although i like the simplicity of the idea] for the reasons i mentioned in the previous thread [housing costs & allowance for extra costs facing disabled people etc].
I also don’t think the Tories would ever conceed a CBI if it was to be paid _independently of willingness to work_. Even i, as a leftie, feel uncomfortable about explicitly guaranteeing people £100/wk if they don’t wish to work.
I see a flat tax as a sort of marketing trick from the right. What they fundamentally object to is the fact that the wealthy have to pay 40% marginal tax rates and those on average incomes only have to pay 22%. They want to get rid of the top tax rate. In exchange, they are offering to eliminate allowances. However, from my point of view – as someone who is merely discussing political ideas, not making practical political deals – i don’t think we need to do things that way. If there is the political will [and administrative skill] the government can eliminate those tax allowances that are unnecessarily [and simply serve as tax shelters for the rich] and keep the ones that are useful (for ex, pension tax reliefs are useful because they encourage people to save).
I see a flat tax as a sort of marketing trick from the right. What they fundamentally object to is the fact that the wealthy have to pay 40% marginal tax rates and those on average incomes only have to pay 22%.
Not really. I’m on the right, and I’ve never, ever got close to that 40% tax rate. Besides, those on average incomes don’t pay 22%, they pay nearer 33% (including NI).
I say that taxes are a necessary evil to allow the government to pay for those services, e.g. the police, that we cannot run through the market. They should not be seen as a way to deliberately undertake a programme of social engineering: that should not be the fundamental point of taxes.
Redistributing the wealth from the haves to the have-nots, regardless of intrinsic personal worth, is not social justice. Let’s take a hypothetical example: if someone works hard, puts in overtime, does well and earns lots, it is not social justice to take a large amount of their money to give it to someone who has no intention of working. It might be justified, and practically useful, to take some of their money to spend towards training someone so that they can work, but that’s a slightly different issue.
As most people here have pointed out, the benefits of a Flat Tax are doubtful without a radical overhaul of the whole system. OK, so let’s do it.
DK
DK, part of the role of a modern state is to ensure some degree of equality of incomes & wealth between peoples. The market works better in a mixed-economy where all have purchasing power.
As I said in my last comment, DK, i feel uncomfortable with the idea of giving money to people who do not have any willingness to work [hence one of my issues with the Basic Income idea]. There is a form of social contract that, to me, implies people should make some productive contribution to society where possible. However, the poor are often rewarded very badly for the work that they do – so state intervention is needed to improve their lot.
GL: I don’t object to that 40% rate as such, on Hayekian grounds that it can hardly be seen as onerous when it’s equivalent to the size of government within GDP; therefore, it isn’t punishing success, as the tax system used to do. (Not that it’s nice seeing 41p go for every £.)
Andrew: CBI for flat tax – never. Flat tax is easy to break up afterwards, by adding super-rates and exemptions; CBI will stay forever. No deal, even if I did like the CBI (and I think JimG’s comments on the previous post illustrate precisely my points as to why Righties should run in horror – the Left will only back it as it grows and grows..).
DK, you seem to misunderstand the expression “social justice”. Here “social” means “the opposite of”. For example, “social housing” means housing that contains a disproportionately high number of anti-social people. Once you’ve cracked the code…..
If there is the political will [and administrative skill] the government can eliminate those tax allowances that are unnecessarily [and simply serve as tax shelters for the rich]
That’s the crux of the problem, though, isn’t it. There isn’t, and there isn’t – and there will never be either, even if Brown hires another 24,000 tax inspectors. Simplicity will at least help to get a good chunk from the rich to help the poor, perhaps a whole lot more than they’re getting away with giving now. To get on with redistribution…
i feel uncomfortable with the idea of giving money to people who do not have any willingness to work
Really? Firstly, I don’t have any problem at all redistributing to the poor. Second, we’re doing it already. It’s just hidden that’s all (“oooh, me aching back”, and so on).
I saw your letter in today’s Standard, Jarndyce!
I’m in two minds about the flat tax idea, as it will mean the rate being set higher if people towards the bottom end of the income scale are to be excluded altogether. So, once you earn over a certain amount, you’ll get clobbered – which will lead to a lot of employers paying their workers slightly less than that.
On the other hand, the phenomenon of people paying nearly half, or more than half, of their money (that is, most of their money) in tax, must be an incredible disincentive, not so much from working as from settling in this country and HQ’ing their companies here. Perhaps some balance needs to be found, such as progressive taxation along a narrower range (then again, our range is already narrower than in some countries).
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I saw a piece on Newsnight which was saying that those on low incomes will be able the same, those on 30k will have to pay about 2K more and those on 200k will be 2K or more better off.
Doesn’t seem like a great idea if you want votes from ‘middle England’ – unless your core voters earn 200k+ each year.
There is a form of social contract that, to me, implies people should make some productive contribution to society where possible
It’s all too easy to come out with generic statements like this. Who wouldn’t agree?
But the question remains: how do you define a “productive contribution to society” ?
I would certainly include stay at home parents who do not work and raise better children due to the fact that they are able to give them more attention and more time.
But I understand that it’s absolutely impossible to do that. How could we be sure that the stay at home parent is going to raise a good child?
Society will forever be tangled up in these issues and to no benefit to it. For the sake of simplicity, the government can’t get bogged down in this kind of thing. It’s why we’re so full of bureaucrats and red tape. We can’t afford to make it any worse.
I don’t know what the solution is.
beware of situations, like this and like the “pensions timebomb”, where avowedly right-wing people are making left-wing cases for policies which visibly do not solve the problem they are aimed at.
If you want to get rid of the “loopholes” in the tax system like trusts, investment subsidies, pension funds and what-have-you, then go for your life; it will be powerfully difficult (not least because most of the real dodges in the system involve exploiting overseas tax treaties which it is in the interests of the overseas haven not to renegotiate) but go ahead. This is a different question from “should we have a flat tax” and should be argued on its own merits. Similarly, I would like to see the argument conducted on a genuinely revenue-neutral basis rather than people pulling sleazy tricks like the Adam Smith Institute helping themselves to between £38bn and £50bn of “efficiency gains” to make the numbers balance at a politically attractive point.
We also need to be pretty cautious in chucking around marginal tax rates. The marginal rate of 91.5% up there is a result of housing benefit and working families tax credit, neither of which anyone would thank you for removing. For purposes of looking at the egalitarianism and progressiveness of the system, average tax rates matter much more than marginal ones; marginal withdrawal rates, particularly ones calculated at benefits pinch-points, are only really interesting to people with a very strong and not very well-supported view about incentives to work (and in any case it is not at all obvious that the best way to deal with pinch-points is such radical surgery).
I’m also not a fan of arguments which pupport to prove that poor people have higher average tax rates than rich people which are based on including consumption taxes. All you’re picking up here is the declining marginal propensity to consume, plus the fact that there are consumption taxes. Again, if anyone thinks that they can find a way of getting rid of excise duty and VAT on a revenue-neutral basis, then let’s hear the argument for that, but let’s hear it separately from the flat-tax one.
Basically, if anyone wants to, “from a left perspective”, suggest a flat tax regime with a marginal rate of 55%, then go for your life, with two caveats. First, if you think that a marginal rate this high passes the political laugh test for the UK at present, then as a former semi-professional comedian I am here to tell you it doesn’t. And second, please please don’t make alliances with people like the ASI who are trying to pass a flat tax with a marginal rate of 30%, they are *not* your friends. In a flat tax system, the marginal rate is all that matters and the question of whether that rate should be set below or above the current higher rate of income tax is not a technical detail which can be ironed out later once the battle is won.
Okay, DD, I’ll get back to you properly on this when I have time. For starters, though, here I’ve tried to explain why the flat tax is an opportunity, and can’t be separated from “closing loopholes” and the like (I know it’s theoretically possible, but I’m talking real, political possible). I consider path-dependency and framing theory to be crucial (real-world political) factors. Second, I’m not so stupid to think that the ASI is the friend of the left, or even the poor. However, it doesn’t mean that everything they produce is bollocks. More soon
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.
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.
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.
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.
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.
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.
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.
“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.
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.
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.