Tax Research UK

The IMF has published a paper on the Laffer curve that concludes:

The paper shows how tax rate cuts can increase revenues by improving tax compliance. The intuition is that tax evasion has externalities: tax evaders protect each other, because they tie down limited enforcement capacity. Thus, relatively small tax rate cuts, which decrease incentives to evade taxes, can lead to increased revenues through spillovers - creating Laffer effects.

The supply siders will be over the moon with joy. There’s just one problem. The assumptions that make this work are:

We investigate an economy populated by a unit volume of taxpayers. There is a single tax authority with limited resources, which audits taxpayers. The model is set up in three steps. First, we describe how tax enforcement works. Second, we introduce the maximization problem of the taxpayer, in particular the decisions on compliance and labor supply. Third, we introduce taxpayer heterogeneity and solve the model.

In other words, this is a blackboard based model. Well, we all already know that Laffer works on a napkin. Adding a formula or forty makes no difference: there is no evidence for it in reality.

This economics is a bit like Nintendo’s Wii. Right around the world now there are millions of people believing they can play championship tennis or beat Tiger Woods at golf. That’s because the assumptions have been changed in the virtual reality model of their world to achieve the illusion they desire. So too with mathematical modelling that creates the assumptions that deliver the result you first thought of. In reality these people can hardly play tennis or golf. And they’re not doing either: they’re playing make believe. This economics is also playing make believe.

So don’t get too excited guys: we won’t be buying the argument. It’s wrong, as almost all evidence based research shows.

Richard Murphy Economics, Flat tax

I was quite pleased to find one of my old articles on flat tax reappear on the web of late. It originally appeared on Society Guardian and never made it onto the Guardian web site. But it was very well read in some very useful places, so I thought it worth giving it a new link.

And I haven’t changed my mind about the conclusion:

Flat tax should, therefore, be seen for what it really is: a mechanism to increase wealth disparities in society.

Richard Murphy Flat tax

Financial Week has a headline that says:

A tax reform plan not only accountants would love

It refers to a proposal by the New York State Society of Certified Public Accountants (the US equivalent of Chartered Accountants) for what they call a simple exact transparent tax (SET).

Now let’s be blunt, the SET is a flat tax. As Financial Week says:

like other flat tax proposals, would tax all income at a single rate-no income brackets, no phase-out of deductions and no surtaxes.

And as Bob McIntyre of Citizens for Tax Justice said:

A flat tax, regardless of what tax code rationalizations might accompany it, favors the wealthy. With a flat tax, people currently taxed at the top rate win

And as in Bulgaria, the poorest lose.

Financial Week says its surprised that CPAs are calling for this:

The U.S. tax code is overly complicated and hard to comply with, but certified public accountants are perhaps the last people you’d expect to develop a fix for it.

I’m not. Too many in accountancy see their role to be increasing the wealth of the wealthiest in our society. After all, that is what wealth management is. And this is a marketing exercise that panders to that market. They know it won’t work. They know it won’t happen. But they’re politically cynical enough to pander to their clients and ignore the ethics of their duty to society as a whole.

Which is why accountants cannot be trusted to act in the public interest.

Richard Murphy Ethics, Flat tax, Tax management

The Sofia Echo reports that:

Salaries of nearly 1.2 million people would decrease after the introduction of flat rate tax in Bulgaria, according to the Confederation of Independent Trade Unions in Bulgaria.

Labour and Social Policy Minister Emilia Maslarova agreed that there was a real possibility for employees in some industries, such as textile, agriculture and food in the private sector, to see their salaries decrease.

These are in Bulgaria, as just about everywhere, the poorest paid in society. Which is yet more evidence, if evidence were needed that flat taxes are not equitable.

But let me be clear: Bulgaria needs tax reform to tackle its endemic corruption. It could have it. But combining that reform with just one tax rate is the mistake. There is no need for that.

Tax simplification and progressive taxation go together. Tax simplification and single rate flat taxes are a recipe for injustice and the reallocation of wealth to the richest in society.

Richard Murphy Ethics, Flat tax

I was at the ICAEW’s Philip Hardman lecture last night. I admit, it’s a bash usually worth attending and this year was no exception.

The lecture was Mike Truman, editor of Taxation magazine and at least once or twice commentator on this blog or issues it raises.

Mike’s theme was simple. It was “can a fair tax system ever be simple”. To his credit Mike never once mentioned flat taxes. Better still, he addressed his subject with a considerable social conscience on display, and on several occasions it would have been hard to spot the difference between what he said and the content of the Tax Justice Network Code of Conduct on Taxation.

Take this as an example. Mike argued that tax requires horizontal and vertical equity, That means people on the same income are taxed the same and people on higher incomes are taxed proportionately more than those on lower income, Quite right too.

Then he argued in favour of the latest Capital Gains Tax reforms by Chancellor Alastair Darling because a) they abolished the distinction between business and other assets and b) gave no tax incentives hold assets for the long time when economic rationality should indicate they should be sold.

I buy that argument but I attach a condition, which I sought to present to Mike as a question, which time did not allow. If you want horizontal and vertical equity and you don’t want to differentiate the tax treatment of disposals dependent on time held or type of asset isn’t there a massive tax simplification that is readily available, which is to charge all capital gains to income tax?

I put the point to Mike afterwards, and he agreed with my point. Indeed, he said the suggestion had been in his draft. But he’d thought it might cause too much indigestion over the dinner that followed.

Have courage Mike, say I. Indigestion is temporary. Tax justice is for keeps!

Richard Murphy Capital Gains Tax, Ethics, Flat tax, Tax Justice Network, Tax management

As if in reply to my Guardian article “Havens and have-nots” Kenneth Rogoff, formerly chief economist at the IMF has an article on the Guardian blog called To have and to have not.

I’ve always been aware that justice is difficult to define, and equity likewise but I have to say that Rogoff and I are a long way apart when he says:

Rather than punitively taxing wealth, globalisation strengthens the case for shifting to a flat tax on income (or better yet consumption) with a moderately high exemption. Aside from the usual efficiency arguments, it is just going to become increasingly difficult and costly to maintain complex and idiosyncratic national tax arrangements.

Unfortunately, movements towards fundamental tax reform are on the back burner in most countries. One can only hope that our children’s generation will grow up to live in a world that does a better job of balancing efficiency and equity than we do.

I don’t want to be unkind to Rogoff, but candidly I find this pretty repulsive. The least taxed as a proportion of income in the UK are the wealthiest. That’s true of many countries. So how is it that the rate of tax wealth suffers is punitive? Especially when the highest taxed in the UK, as a proportion of income are the very poorest?

No one has shown that flat taxes will alter this. In Bulgaria where a flat tax is on its way no one agrees with Rogoff that this will reduce inequality: everyone thinks the poorest will pay more. The IMF did not find an improvement in after tax income equality in Russia after the introduction of flat taxes. In Slovakia where there is 19% VAT, 19% income tax and 19% corporation tax national insurance was, the last time I looked a massive 48%, and it is, of course, charged on employed income alone.

How and why then is not taxing wealth equitable is the question I ask?

And I’ll answer very simply: it can never be so. Ever. However you define justice, and however you define equity. But that’s what Rogoff wants.

He abuses the English language in the process of making his claim.

Richard Murphy Ethics, Flat tax