I had UKIP's draft tax policy drawn to my attention yesterday. It has the virtue of being almost incoherent in presenting many of its arguments. Other claims are just wrong. The summary says:
UKIP believes in a fairer, simpler, flatter tax system which would cost less to administer and gain more in revenue, especially from the better-off. We would take everyone earning the minimum wage out of tax altogether. In this paper, financial economist Godfrey Bloom MEP sets out his radical proposals for a 'flat tax'. UKIP's new Tax Policy will be published later in the year.
Bloom has, of course, been discredited by his party. The policy remains though, and is likely to do so. What that means is that the counter arguments to flat tax need to be honed. Last year the BBC published this short piece by me on flat taxes:
The myth that flat taxes are simple and would raise tax revenue is just that: a myth.
It's also a myth that a great deal of the UK tax code could be eliminated. That is not true unless we wanted to scrap whole taxes and lose the money they raise.
It is that last point that provides the real clue to what flat taxes are all about. It is not chance that they are always promoted by people who also argue for small government and massive cuts in public spending. That is what they are intended to deliver, and I have to agree, they would.
But there's even a sting in the tail in that.
Currently the top 10% of all income tax payers in the UK pay about 59% of all income tax. They also pay tax at higher rates than anyone else. That is why they pay so more, but that's also because they earn more than most, of course.
Under a flat tax system they would enjoy substantial — maybe massive — tax cuts.
Those on low incomes would almost certainly pay more because around the world flat tax systems are associated with high National Insurance contributions — that hit the lowest paid hardest.
So flat taxes are really about cutting taxes for the best off, cutting services (like the NHS) massively and requiring payment for their use instead, and increasing tax, overall, for the least well off. That's the reality.
And as for simplification? That won't happen, first because business needs complex tax systems to let it do the complex trades it undertakes, and second, because most of the complexity is about defining just what is taxable. That's the hard bit. Multiplying by two percentage rates rather than one is, in comparison, no problem at all.
So flat tax would simplify almost nothing, but leave you paying to see the doctor or educate you children. That's what the flat taxers fail to mention.
There is more here. And a lengthy work, here. Plus this. They'll do for starters, but the key issue is this, which I write in 2006:
Flat tax is not a serious attempt at taxation, but is instead an exercise in social engineering. That is why its innocent appeal is so dangerous.
The social engineering would cost the ordinary people of this country access to many of the services on which they are dependent. that is why I oppose flat taxes and that is why UKIP support for such taxes needs to be addressed openly and honestly with facts.
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So you are once again self-referencing why you think a flat tax would raise no revenue with a piece you wrote saying flat taxes would raise no revenue.
If the aim is to raise only enough to pay for 33% of GDP state spending and we currently raise almost 40% in tax then the claim is self evidently true
I’m not sure where you get the 33% number from (another one of your pieces?) but it isn’t necessarily the case that flat taxes drop the tax raised as a % of GDP.
Whilst there will be winners and losers, most proposed flat tax systems remove most of the allowances for the better off, and roll much of the benefit system into the tax system by trying to remove the low paid from tax altogether.
Simply asserting that a flat tax will mean the rich pay less because their nominal tax rate goes down is a gross simplification.
Of the various types of flat tax (four off the top of my head?) the one UKIP are proposing is actually called a negative income tax (am sure there are links on web to describe fully), which is actually a progressive tax on marginal utility.
Leaving aside all the other arguments, there is plenty of evidence that Flat taxes can increase overall tax revenues – Russia being the prime example but about 40 countries in the world use some sort of flat tax. Nor is there much evidence to show that countries with a flat tax rate have massively different total tax reciepts as a % of GDP – data available on wikipedia for simplicity.
33% is an IEA target
And the rest of your piece is rhetoric not fact
Flat tax does not reduce allowances – most of which are in business accounts
But it does cut all wealth tax
And often tax on overseas income (so tax haven looted funds stay tax free)
And removing the poorest from tax does not work – as they lose much more from benefit cuts.
As for the Russian case – that had nothing to do with flat tax – it had to do with eliminating crime post the 1990s revolution – it is an absurd example
Your claims do not stack
But the tell me a lot about you
It would be possible to have a flat income tax that raised revenue. I did some calculations a couple of years ago for CentreForum of an income tax system with a single rate of 40% and a personal allowance of (something like) £15,000 and that raises revenue compared with the current system. But this sure as hell isn’t the kind of flat tax which UKIP are thinking about! They want to use it as a vehicle to reduce public spending and redistribute to the super rich.
“Flat tax does not reduce allowances — most of which are in business accounts”
Many flat tax regimes specifically reduce or remove allowances. Again, check wikipedia to see the information on those in existence.
“But it does cut all wealth tax”
Again, not necessarily, though you have simply assumed as much. I’m not sure where you are getting the data for your bold assertion from – please link.
“And removing the poorest from tax does not work — as they lose much more from benefit cuts.”
You simply don’t undertand the idea of a flat tax/negative income tax here. Benefits become part of the tax system. As a simple example, the flat tax rate is 25%, and the NIT threshold is 20k.
A person earning 15k pays no tax, and gets 5k of “NIT” or benefits from govt to top them up to 20k.
Someone earning 30k only pays tax (at 25%) on the amount above 20k, so in this example takes home 27.5k.
The idea being that the poor don’t lose out on the removal of “benefits” and the ssytem is simplified.
“As for the Russian case — that had nothing to do with flat tax — it had to do with eliminating crime post the 1990s revolution — it is an absurd example”
There are various reasons for Russia’s huge increase in tax revenues, including GDP growth, but it certainly wasn’t due to “crime” as you put it. The flat tax came into force in 2001 and income tax returns jumped 26%.
“Your claims do not stack But the tell me a lot about you”
Please enlighten me, what do they tell you about me?
Your claims have no evidence which isn’t self-referenced. A quick look through the various online sources (wikipedia, KPMG amongst others) would tell you that the arguments against a flat tax aren’t as simple as you make out – the poor don’t necessarily suffer and the rich don’t necessarily pay less tax.
Let’s deal with one thing you say I don’t know about
Please read this
http://classonline.org.uk/pubs/item/financing-the-social-state
I know and Howard Reed and I have done the maths
OK so another paper you wrote – or in this case co-wrote.
Having read it quickly, it doesn’t discuss a flat tax at all – so I’m not sure what this paper clears up. I’m assuming that you are referrign to the “citizen’s wage” part which is similar to the negative tax part of NIT?
Whilst I do agree with some parts of the paper (merging income tax and NI, encouraging people back to work), the paper doesn’t answer the other question though relating to a flat tax, and it even states in the conclusion:
“We would, of course, propose that the tax be progressive and admit that at present we have not completed calculations on an appropriate scale of such progression”
Not completed – but the rate required goes well above 50% – as you will note
Impossible to deliver justice with a flat tax
There are two places where arguments for flat taxes have at least superficial force.
First, places like Eastern Europe post-USSR, where they needed simple and easily understood systems that could be introduced speedily and efficiently. Not very relevant to the UK.
Second, the US, where there is a bewildering system of allowances and reliefs, few people pay tax at the actual marginal rate, and tax returns require professional advice for even people on modest incomes. In the UK this is just not the case – for most people there are no reliefs available at all save the personal allowance and pensions relief, and most people don’t have to complete a tax return.
So Richard is correct that in practice the only effect of a flat tax on individuals in the UK is massively reducing tax revenues and redistributing from the poor to the rich.
(Small caveat: it would probably be a good thing to make UK corporation tax a flat rate and abandon the lower rate for smaller companies. The benefit is limited and it creates unnecessary complexity and avoidance opportunities)
The difference between U tax rates for companies is 1% very soon
You ignore the fact the low rate was meant to compensate for the higher cost of capital of smaller business
Why?
Multiplying any figure by one or more % rates is the easiest thing in tax
Why simplify it at enormous cost?
The problem with corporation tax isn’t the rates (although bear in mind that marginal relief means that it is more complicated than simply having two different corporation tax rates).
The real problem is the highly complex associated company rules which are difficult for both small companies and HMRC to apply, and have been the subject of considerable avoidance.
When the difference in rates is 1% the cost and complexity will be completely disproportionate. Even at today’s rates, the maximum saving for a company with £300k of profits is only £9,000. So I don’t see the “enormous cost” you mention.
The cost is the £10 billion give away to large companies
http://www.taxresearch.org.uk/Blog/2014/01/30/george-osbornes-10-billion-a-year-tax-giveaway-to-big-companies/
Regressive taxation. Not “from each according to their ability”. Let the rich and powerful off, and concentrate on taking money from those least capable of resistance.
Why does any one think the rich and powerful won’t use all the ingenuity they deploy to avoid the current tax system to avoid flat rate taxes? Hiding money in tax havens still works, and cunning accountants will still have schemes to sell.
They won’t need to ‘hide the money in tax havens’ because the flat tax system is likely to make many types of income and gains tax-free. It’s basically wacing the white flag to tax avoidance.
Agreed
They say ‘feel free’ – take your money and run
“Those on low incomes would almost certainly pay more because around the world flat tax systems are associated with high National Insurance contributions”
It’s just plain wrong to say flat taxes are associated with high National insurance. Much of eastern Europe has flat tax systems and low Social security rates. The figures are easily researched (e.g. KPMG’s world-wide tax survey).
There are around 40 countries world-wide with flat tax systems. How many of them have ‘high national insurance contributions’ and which are they?
When I surveyed the issue my claim was factually based
I suspect it still is
If you want to present alternative evidence please do
There was an interesting article in the Telegraph on Saturday showing how much people pay and receive back in tax by decile. To me, the most interesting aspect was how the tax and benefit system peg almost everyone into a narrow band of earnings except those in the top 15% (and to a lesser absolute degree but probably a bigger practical one, the bottom 10%).
http://www.telegraph.co.uk/finance/personalfinance/consumertips/tax/10638283/How-much-we-give-the-state-in-tax-and-how-much-we-get-back.html
So a person in the second decile earning £15,500 ends up taking home £26,700+ after benefits. Whereas a person in the eighth decile earning £47,800 takes home a fraction over £40,000 after tax. So, for £32,000+ extra earnings you end up taking home £13,000 more.
Someone earning £100k takes home £73k, so you can see the differential has worked itself out by then.
But if I was UKIP or any major party I would be looking at what happens for the middle 70% of earners and trying to reduce marginal rates there.
Roger I can’t quantify this but most of the lower deciles (excluding the disabled, unemployed, pensioners) are also wealth creators to a large extent. Much of what they create for their employers is counted as the income, dividends and capital gains, salary of the top deciles. To give one example, the workforce in a local factory on low wages create the income of the shareholders who own it and on which they pay taxes.( I hope they do) Obviously, the higher income people contribute a large percentage of the country’s income and may be said to earn it but not all of it is created by them.
Roger -i think you’ll find that 30 years of banking inspired housing bubbles is largely responsible for this and the squeezed middle.
I know you can’t go beyond your populist ideals of tax the rich to pay for everything but a flat tax raises more revenue and encourages more investment. When the Conservatives cut the rate to 45% why did it raise more revenue than 50% going by your logic? President Hollande started a program of tax the rich and spend, guess what it didn’t work, tax receipts went down and the economy continued to stagnate. High taxes = tax avoidance. Numpty.
It did not raise more tax: that was the result of manipulation because of deliberate pre-announced changes
There is also no evidence that low tax reduces avoidance which is why Jersey has a general anti-avoidance principle
Please get facts right
Richard is quite right.
Flattax
Accountants up and down the UK were “gaming” the system.
Early dividends were taken before intro of the 40% rate, etc etc.
The 50% rate wasn’t in long enough to be effective
Since when has 50% been high
In times of crisis they have in the past been much higher.
With regard to tax avoidance – what is lacking is the political will to describe it properly and then to shut it down!
sorry poor drafting “Early dividends were taken while the 40% rate existed immediately before the intro of the 50% tax rate , etc etc…..
“And removing the poorest from tax does not work — as they lose much more from benefit cuts. ”
More? Perhaps the same, perhaps less. Depends what the marginal tax and benefit rate becomes.
But it’s also clearly true that if we cut the taxation of the poor, so that we reduce the benefits they need to receive, then we reduce the need for tax revenue to pay benefits to those same poor.
Tim
You know that the direct tax paid by the poorest is tiny in amount whilst their indirect taxes are very high
Please do not be disingenuous
You also know the vast majority of benefits are paid to people in work because their employers do not pay enough. The incidence of that benefit paid is therefore their wealthier employers
It’s odd that you never consider this
Richard
I suppose it depends who we’re talking about. Clearly the unemployed pay no income tax/NI. However someone on the minimum wage will earn around £1,100 per month before tax, and pay income tax/NI of about £120 (plus employer’s NI of another £70). So that’s an overall effective tax of 11% (or 18% if you include employer’s NICs) which is not nothing.
It would seem to be highly progressive to take minimum wage earners out of income tax/NI altogether. The question is how to do this cost-effectively without handing large amounts of tax back to high earners (and without creating complexity or high marginal rates).
It seems that way
It just so happens most of the benefit goes to those a lot further up the income scale and that is exceptionally poorly targeted as a result
The belief that this works is straightforwardly simplistic
Now why is that?
And remember – no NI, no benefits and no pension
Is that what you want?
“You also know the vast majority of benefits are paid to people in work because their employers do not pay enough. The incidence of that benefit paid is therefore their wealthier employers
It’s odd that you never consider this”
This is a little odd as I have spent a number of years writing on this very subject. It was indeed me who first pointed out that the difference between the Living Wage and the minimum wage is in fact the taxes charged to those on low wages. I’ve pointed out, repeatedly, that I’ve no problem at all with the method by which the Living Wage is calculated: it is after all an adaptation of Adam Smith’s linen shirt example.
You have repeatedly insisted that the entire incidence of employers’ NI is upon the wages of the workers. And when you add employers’, employees’ and income tax together then the minimum wage, tax free, is actually higher than the Living Wage post tax.
The total amount that employers are paying in wages is therefore more than sufficient to provide a Living Wage. It’s the amount of that wage that is charged to tax which reduces net incomes below it.
I repeat the calculation every year and the result is indeed always the same. What takes current wages below the Living Wage is the tax that is charged to those low wages.
And it is precisely this point which leads to the UKIP proposals: for it is not a coincidence in the slightest that I was involved in producing those UKIP proposals.
Hang on – you’re saying the fault of not paying a living wage rests with government and not employers?
Can you be more absurd?
This one beggars belief
PS What does amuse me is that you concede in your argument that Murphy & Nagel are right – the entitlement of an employee is to their wage after tax
Tim
Are you in the UK? Rumour has it you’re overseas a lot.
I think you need to visit more often. Here’s a thought perhaps in the interests of research you’d like to attempt a 21st century equivalent of the “Road to Wigan Pier”.
Why does it matter where TW is?
Can he not comment because you have some geographic discriminatory rule? Can’t find that in the new comments policy.
Obviously RM doesn’t as TW comments here often – so what has it to do with you where TW is?
I think the implication is that Tim Worstall may not be familiar with what actually happens in the UK
I think that a generous suggestion
I do not think he is familiar with reality or the human condition let alone the nature of human relationships or he could not write the revolting blog for which he is responsible
Thank Richard yes that is exactly what I meant and hence my urging for TW to do some real ground level research.
No Max this was not my attempt to inject some element of discrimination, so your attempt to discredit me without offering up any comment of substance hasn’t worked.
The flat tax proponents put forward incomplete facts and misinformation if they aren’t peddling lies and myths to support their case.
Most of these same people also continue to peddle myths that the unemployed live a life of luxury surrounded by 50 inch TVs etc funded by the taxpayer.
They condemn the working poor too, by suggesting that they have no one to blame but themselves, because they are lazy etc etc and should be able to subsist on a wage of £1 per hour.
Then these same caring individuals suggest that the numbers attending food banks are due to increasing numbers of incompetents ie the unemployed and the working poor deciding to mooch and scrounge rather than work harder in their below living wage job.
All these ripping yarns come from the same group of sociopaths that display their “ingenuity and thoughtfulness” by putting together the infamous “McDonald’s Budget”.
All they do is demonstrate they are totally out of touch with reality and have absolutely no empathy for those that are trapped in a soul destroying existence from which the escape routes from such an existence are one by one being slammed shut in their faces.
It’s just annoying the amount of hot air expanded about income tax and reference to low earners when no one mentions the most invidious of taxes on low earners is not income tax but NI. This tax needs to be rolled up into income tax before any changes are considered and then at least we’d know whether tax changes really were intended to help the worst off-but in work group as opposed to those who can ‘manipulate’ balance sheets and tax returns in order to minimise their tax bills.
This is the Godfrey Bloom who, in an interview with the Guardian, said he believed people should be charged for using the NHS, and the welfare state abolished. He is also, according to the Wikipedia entry I’ve read, a climate change denier, as well as having something of a reputation for being, shall we say, a little bit sexist.
And also from Wikipedia, there’s this gem:
“During a LBC Radio interview in November 2013, he called for the unemployed and public sector workers to lose the right to vote.”
Given these kind of views why should we take his tax policy seriously? And since he has now fallen out with Ukip and been sacked by it, why are they still using his policy? God help us all (except for rich fascists and their hangers on) if anybody like this ever gains power in the UK.
Ukip – the party for people for whom the ‘nasty, stupid party’ isn’t nasty enough or stupid enough.
They have a serious slug of the vote
I take that seriously as I am a democrat
we are heading towards a “flat tax” in the form of “corporation tax” ignoring the special privilege rate aimed primarily at the multinationals (for example Big Pharma) called the “Patent Box” regime.
Flat taxes simply won’t work when we have unprecedented levels of inequality in not only wealth but income too. All they do is consolidate the position of those on top, while those at the bottom suffer from cuts in benefits and resources (eg disappearing public libraries).
Flat taxes would only work if there were a massive dose of “pre distribution of income” which require most businesses to operate as employee owned and managed enterprises in order to curb the excesses of the 0.01%.
How likely is that?
I don’t think flat taxes can ever work
Yet there are plenty of countries (about 40) around the world using them with little problem? Given this real world evidence, I don’t know how you can say they can never work?
Because they don’t
They’re not flat taxes, for a start
For practical purposes I agree!
I can’t see there’ll ever be a day when the highest paid employee will be paid no more than say 10 times the lowest paid one throughout the entire business sector! 🙂
im afraid you reveal your ignorance of the patent box incentive. Its not used exclusively by big pharma – its used by everyone. you need one single patent used in something and the whole lot falls into the regime…..very generous
A complete state subsidy to monopoly then
Anthony
I said “…ignoring the special privilege rate aimed primarily at the multinationals (for example Big Pharma) called the “Patent Box” regime….”
that does not equal
“it is used exclusively by big pharma”
As a tax practitioner too, (I assume you are?) I am aware that they can be used by SMEs but I think you’ll find that “you need one single patent used in something and the whole lot falls into the regime” is perhaps an over simplistic interpretation of the rules.
Well clearly I am not going to spell out the conditions for the patent box regime as RM’s blog is not a tax technical discussion forum, but I think its a reasonable summary to say you need one registered Eu patent in a product and you are away as far as the Patent box is concerned.
If you are a tax practitioner I assume your clients have been using the regime?
As a practitioner I can never recall having a client with a patent
Although I personally got very close once
Anthony
No I would not dream of troubling you to work through the Patent Box scheme here.
I would ask though is that you think about who lobbied for their introduction and why and the likely impact of the reduced revenue on other members of society not just other taxpayers.
I think this far more interesting than the actual rules of the scheme.
You make a number of statements about the low paid, their tax and their benefits that are certainly open to challenge (OK, I know anyone prepared to challenge you is a troll, but hey ho)
1, “And remember — no NI, no benefits and no pension”
And yet the Howard Reed/Richard Muprhy paper you highlight on this string actually calls for IT and NIC to be merged into a unitary tax. The statement doesn’t withstand your own personal analysis.
2. “You know that the direct tax paid by the poorest is tiny in amount whilst their indirect taxes are very high
Please do not be disingenuous”
No, you are being disingenious here. The amount is not “tiny”, not to them. I find that patronising in the extreme! I would also point out that the living wage calculation is built up from a post-tax wage designed to be sufficient to accomodate indirect taxes in living expenses. If you think about it that must be how it’s done or it would have no credibility. So tax has a significant impact on living wage calcuations. And again, direct and indirect taxes are significant; not “tiny”.
3. “It just so happens most of the benefit goes to those a lot further up the income scale and that is exceptionally poorly targeted as a result”
Well, I’m very surprised to hear you echoing an IFS paper but, again, no! Personal allowance and basic rate tax applies only within restricted ranges. The flat, absolute benefit goes equally to those higher up the income scale, that is true. However, as a proportion of total income, increased allowances positively impact on the low paid much more. The IFS is wrong and you’re wrong.
4. “And removing the poorest from tax does not work — as they lose much more from benefit cuts”.
Tax is tax; benefits are benefits. One does not need to depend on the other. Your statement can only possibly apply if benefit claimants are presently experiencing greater than 100% marginal rates. if that is what you are saying then you are making Iain Duncan-Smith’s case better than he ever has. And you’re not doing that are you?!!
A last thought Richard; it may be within the rules of your blog to scream “troll” at anyone who questions you are disagrees with you. Doing so disqualifies you though from being a serious contributor to national debate.
1) We proposed a wholly different system. The reference was to the existing system
2) Compared to other taxes and benefits it is small – and if benefits were lost as a result it would be huge, which is the aim
3) I’m happy to be in the company of the IFS on this occasion – as we’re right
4) Money no object!! Phew, I’m glad you agree. Pay more benefits,now.
Your last point is posted further to point 5 of the comments policy, to which attention is drawn. Since all publications face the issue I do, and the DT has just discussed it, your point makes no sense at all.
well we could discuss all, er, 5 points here. But please just help me out on Point 4.
“money no object, glad you agree”. Sorry, I don’t get it. What are you talking about? What is it you are trying to say exactly?
My point is simple: removing a direct tax burden from the low paid is a GOOD THING; an unqualified, undiluted GOOD THING. Who could possibly argue against that? Except you just have!
It need have no bearing on and not be influenced by their benefits. The only way less tax means lost benefits to the extent they are worse off is if means-tested benefits mean we have effectly created a >100% marginal rate of tax.
And my point is that if removing that payment denies payment of benefits due to no funding, or pensions as no NI is paid, or the vote as some now suggest then you are unambiguously wrong
There is also very clear evidence that it also increases electoral disaffection; nother major concern
So, removing the “tiny” – your word (and I repeat, it is not tiny TO THEM) – amount of tax from the low paid will lead to no benefits, no pensions and NO VOTES will it.
1. Please don’t attribute arguments to me that I haven’t and wouldn’t make. What is the point of joining a debate if one can’t debate honestly? I would never relate representation to an individual’s tax bill.
2. Are you really trying to argue that the country’s welfare provision is dependant upon the tax taken from the low paid? Graphs showing tax paid by quintile and decile have been shown on this blog. They show who pays tax and who gets benefits. It is clear that trying to link the amount the country pays in benefits with what the low paid pay in tax is a straw man argument.
3. Reducing people’s tax burden increases their electoral disaffection: really?
4. I argue that removing the tax burden from the low paid, brnging them closer to the Living Wage is a good thing, unambiguously so. I am astonished you don’t agree.
This comment has posted further to point 5 of the comments policy to which attention is drawn.