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

There are those who would like to suggest that Iceland is the next economic miracle state. Its flat taxes, high income, large overseas investment portfolio; all are hailed as signs of its success.

So take a sober moment and reflect on the fact that yesterday, according to the FT:

Iceland’s central bank raised interest rates by 45 basis points to a record 13.75 per cent on Thursday in an attempt to rein in stronger-than-expected inflation in its fast growing economy.

Now is that a success story for the Icelandic population at large, or a story of the exploitation of their territorial space?

I leave you to choose. I know what I think.

Richard Murphy Economics, Flat tax

I’m on record as saying I think the cut in Capital Gains Tax to 18% is a straightforward disaster. But at least I have done so for reason of principle. I was amused to read the follwoing in The Telegraph this morning:

Furious insurers are demanding urgent talks with the Government after it emerged that they will lose billions of pounds in lost revenue should the Pre-Budget proposals for a flat rate of capital gains tax at 18 per cent come into force.

The Association of British Insurers fears sales of investment bonds - worth more than £20bn in 2006 - will grind to halt. Returns on life insurance-based products will continue to be classed as income and so higher-rate taxpayers will pay tax at 40 per cent. On the other hand, returns on products such as unit trusts will be treated as capital gains and taxed at 18 per cent. One senior insurance insider called it “a cock-up” and added: “This could be a disaster - we’re buggered.”

Or as another put it:

As a private investor, especially a higher-rate taxpayer, why would you invest in a bond now? The Pre-Budget Report has thrown financial planning into chaos.

It seems that these financial advisers aren’t all that keen on tax cuts after all. It’s the loopholes they like.

So much for the supposed desire of the Right for flat taxes, simplicity and low rates. They clearly don’t suit them. It’s one of the few lessons worth noting from this.

Richard Murphy Flat tax, Tax avoidance, Tax management, Tax planning

Earlier this year, the U.S. Republican Candidate John McCain repeated a curious myth, often repeated in U.S. political debate, saying:

Tax cuts, starting with Kennedy, as we all know, increase revenues.

As the New York Times op-ed contributor Jonathan Chait remarked, it was the political equivalent of Galileo conceding that the Sun does indeed revolve around the Earth.

For the rest, read the excellent blog that explores this theme by Nick Shaxson at the Tax Justice Network blog site.

Richard Murphy Economics, Flat tax, Tax management

The Sofia Echo (one of my regular reads these days) reported yesterday that:

Mart Laar, former prime minister of Estonia, said the flat tax model was used by countries wanting to achieve speedy economic development, but the model was not without consequences and special requirements.

Speaking on October 3 at a conference in Sofia entitled Second Decade of Growth: Risks and Opportunities…he said the Estonian model consisted of radical reforms, in all spheres at once, he said, meaning radical tax reform, accompanied by health care and education reforms. These radical reforms did not lead to shocks, Laar said, they would just lead to speedier development.

However, he said, the model does cause a certain amount of public discontent because of the speed of changes.

A requirement for the Estonian model to function was a country’s ability to absorb European structural funds, something which could only be done by a government which was not corrupt. This requirement was, under current circumstances, a problem for Bulgaria, Laar said.

As many will know, I don’t think Estonia has a flat tax, but I think this comment is fascinating. Corruption kills all chance of reform, wherever you are going.

Richard Murphy Corruption, Development, Flat tax