Comments on: New York CPAs propose flat tax http://www.taxresearch.org.uk/Blog/2007/12/04/new-york-cpas-propose-flat-tax/ Richard Murphy on tax and corporate accountability Thu, 04 Dec 2008 00:13:27 +0000 http://wordpress.org/?v=2.6 By: Tim Knight http://www.taxresearch.org.uk/Blog/2007/12/04/new-york-cpas-propose-flat-tax/#comment-303835 Tim Knight Wed, 05 Dec 2007 21:33:03 +0000 http://www.taxresearch.org.uk/Blog/2007/12/04/new-york-cpas-propose-flat-tax/#comment-303835 It is a deceit to discuss any proposition for a ‘tax regime’ in isolation from the accompanying tax-credits, benefits and means-testing. For example, consider the two following regimes: - Regime 1 includes tax-credits/benefits of £3,000/y means-tested at 75% on income up to £4,000/y, tax at 0% on income up to £4,000/y, and tax at 25% on income above £4,000/y (i.e. a ‘progressive tax regime’). - Regime 2 includes tax-credits/benefits of £2,000/y means-tested at 50% on income up to £4,000/y, a new non-means-tested tax-credit/benefit of £1,000/y, and tax at 25% on all income (i.e. a ‘flat tax regime’). The differences between these two ‘regimes’ are purely-administrative. They are indistinguishable in economic terms. Both regimes are ‘progressive. Specifically: - Those with an income of £0/y would end up with £3,000/y, and an average tax rate of minus infinity (i.e. meaningless). - Those with an income of £2,000/y would end up with £3,500/y, and an average tax rate of minus 75% (i.e. meaningless). - Those with an income of £4,000/y would end up with £4,000/y, and an average tax rate of 0% (i.e. meaningless). - Those with an income of £8,000/y would end up with £7,000/y, and an average tax rate of 12.5%. - Those with an income of £20,000/y would end up with £16,000/y, and an average tax rate of 20%. - Etc.. Unfortunately, consideration of propositions for ‘flat tax regimes’ are obfuscated by hidden agendas: - Most/all propositions for a ‘flat tax regime’ fail to include the required neutralising measures outlined in the earlier exposition. Such propositions undoubtedly worsen directly the lot of the poor (and thereby improve indirectly the lot of the rich with the consequential reductions in high-level tax). However, criticism should be limited to the spurious failure to include the required neutralising measures. - Most/all propositions for a ‘flat tax regime’ are actually poorly-disguised beggar-thy-neighbour ‘low-tax regimes’ (equivalent to reducing the 25% tax rate outlined in the earlier exposition. Such propositions undoubtedly improve directly the lot of the rich (and thereby indirectly worsen the lot of the poor with the consequential reductions in tax-credits/benefits). However, criticism should be limited to the ‘low’ rather than the ‘flat’. Don’t throw the baby (flat taxes) out with the bathwater (the spurious obfuscations). It is a deceit to discuss any proposition for a ‘tax regime’ in isolation from the accompanying tax-credits, benefits and means-testing. For example, consider the two following regimes:

- Regime 1 includes tax-credits/benefits of £3,000/y means-tested at 75% on income up to £4,000/y, tax at 0% on income up to £4,000/y, and tax at 25% on income above £4,000/y (i.e. a ‘progressive tax regime’).

- Regime 2 includes tax-credits/benefits of £2,000/y means-tested at 50% on income up to £4,000/y, a new non-means-tested tax-credit/benefit of £1,000/y, and tax at 25% on all income (i.e. a ‘flat tax regime’).

The differences between these two ‘regimes’ are purely-administrative. They are indistinguishable in economic terms. Both regimes are ‘progressive. Specifically:

- Those with an income of £0/y would end up with £3,000/y, and an average tax rate of minus infinity (i.e. meaningless).

- Those with an income of £2,000/y would end up with £3,500/y, and an average tax rate of minus 75% (i.e. meaningless).

- Those with an income of £4,000/y would end up with £4,000/y, and an average tax rate of 0% (i.e. meaningless).

- Those with an income of £8,000/y would end up with £7,000/y, and an average tax rate of 12.5%.

- Those with an income of £20,000/y would end up with £16,000/y, and an average tax rate of 20%.

- Etc..

Unfortunately, consideration of propositions for ‘flat tax regimes’ are obfuscated by hidden agendas:

- Most/all propositions for a ‘flat tax regime’ fail to include the required neutralising measures outlined in the earlier exposition. Such propositions undoubtedly worsen directly the lot of the poor (and thereby improve indirectly the lot of the rich with the consequential reductions in high-level tax). However, criticism should be limited to the spurious failure to include the required neutralising measures.

- Most/all propositions for a ‘flat tax regime’ are actually poorly-disguised beggar-thy-neighbour ‘low-tax regimes’ (equivalent to reducing the 25% tax rate outlined in the earlier exposition. Such propositions undoubtedly improve directly the lot of the rich (and thereby indirectly worsen the lot of the poor with the consequential reductions in tax-credits/benefits). However, criticism should be limited to the ‘low’ rather than the ‘flat’.

Don’t throw the baby (flat taxes) out with the bathwater (the spurious obfuscations).

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