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Flat tax is never just and never equitable

Ethics, Flat tax Comments Off

Nov 112007

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.

Iceland’s economic miracle – inflation and interest rates of 13.75%

Economics, Flat tax 7 Responses »

Nov 022007

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.

Tax cuts really do not please people

Flat tax, Tax avoidance, Tax management, Tax planning 1 Response »

Oct 152007

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.

The earth isn’t flat

Economics, Flat tax, Tax management 2 Responses »

Oct 122007

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.

‘Flat tax’ only works in the absence of corruption

Corruption, Development, Flat tax Comments Off

Oct 042007

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.

Democracy and Opportunity: A New Paradigm in Tax Equity

Economics, Ethics, Flat tax, Tax management Comments Off

Sep 262007

I’ve just reviewed a KPMG paper on tax and CSR. It’s lame.

So why not read something really good instead. Try the paper with the above title available here. This is a fascinating read, well argued and quite simply moves the debate on tax justice forward considerably. I’d call it seminal.

The abstract says this:

Although there is consensus about the need for equity, academics and policy makers disagree about the best tax system because we have ignored the need to first identify equity goals appropriate for a just government and then to design a tax system to help achieve those goals. This article proposes that the principal equity goal underlying a just government is the creation of equal opportunities for all citizens to achieve self realization, i.e. to maximize their potential. It proposes, therefore, that a tax should be designed to achieve equal opportunity for self realization as one of its principal goals. Viewing equal opportunity for self realization as a design issue leads to the identification of another principle that is foundational – the promotion of democracy. Both political philosophy and empirical literature suggest that equal access to the electoral process and participation in the community has to exist in order for equal opportunity for self realization to exist. Designing a tax system to help achieve these goals will not only increase equity, but also may provide efficiency gains that analysts have previously ignored.

To illustrate the importance of designing a tax system based upon these equity principles, this article revisits the debate about the desirability of an income tax versus a consumption tax. It argues that a progressive income tax, which limits loss deductions, is better than an ideal consumption tax in establishing the conditions for equal opportunity for self realization and democracy. A progressive income tax that limits loss deductions burdens investment income, which is a major source of political power. In contrast, a consumption tax cannot burden the disproportionate political power of the wealthy because it only burdens investment income in narrow situations and wealthy individuals only consume a small percentage of their total income. Although taxpayers can use portfolio adjustments to eliminate the burden on investment income in an ideal income tax, they have not used such adjustments in our actual income tax. This behavior may result from taxpayer concern that portfolio adjustments can decrease the after-tax return below that obtained in a fully taxable situation due to our tax system’s limitations on loss deductions and changes in applicable tax rates.

This article also analyzes some other efficiency and equity claims for the two forms of taxes. The efficiency claims for an ideal consumption tax versus our existing income tax are overstated when viewed in the context of real-world systems that take into account taxpayer behavior and transition relief. Given the uncertain efficiency gains of a consumption tax in the real world, there is a strong argument that the equity goals discussed herein should govern the selection of a tax system. Such equity goals favor a progressive income tax that burdens investment income.

The download is free, but you have to register.

If you don’t read it you’ve missed something little short of a gem. If you’re in any doubt read that last paragraph of the abstract again and then believe me that James R. Repetti delivers on his promise to prove this is the case.

I think it’s true that to be great any work of art, film, play, music or article should make you view the world differently after you’ve experienced it. This article does that.

Thanks to Martin Tittle for the recommendation.

When the world lives in fear of progressive taxes

Ethics, Flat tax, KPMG Comments Off

Aug 292007

The was an article in the Polish press yesterday with the title:

Poland’s progressive tax system could alienate investors

As the story said:

Finance experts and business people are pointing out that Poland is surrounded by countries with low, flat tax rates. If Polish governments refuse to grasp the nettle and lower tax, investment might just head abroad.

The pressure, of course, comes from the so called ‘flat tax’ states – so called because they are nothing of the sort.

But who were the ‘finance experts’? Why, KPMG (of course):

“If ]Poland] doesn’t introduce it, the country lose the foreign investment battle, we’ll be less and less competitive”, Peter Kay, financial expert from KPMG, a worldwide consultancy was quoted in Poland’s Dziennik daily.

As the senior prime minister rightly said though:

Flat tax works like a counter Robin Hood: takes away from the poor to give to the rich

Which is, of course why progressive taxation is essential. But do KPMG care about that? Not one bit. They’ll whistle all the way to the destruction of social justice.

Bulgaria’s flat tax goes flat

Flat tax Comments Off

Aug 072007

I’m delighted to see that enthusiasm for Bulgaria’s new flat tax is underwhelming. I’ve read a lot of Bulgarian material on this over the last week. The follwoing is typical, and comes from the editorial columns of the Sofia Echo:

The agreement announced by the three parties in Bulgaria’s ruling coalition to introduce a flat tax system in 2008 has had a mixed reception.

It goes on to say:

The idea is to tax all individual incomes at 10 per cent, scrapping the current three-bracket system. Prime Minister Sergei Stanishev and his lieutenants, including Economy Minister Petar Dimitrov, say that they believe that the new system, along with a cut in social security contributions, will bring more revenue into the system. They say that they believe that the new system will encourage a higher level of compliance.

It’s clear that the paper does not believe this.

However, the proposal has its detractors. Podkrepa labour federation says that everyone up to a gross monthly income of 450 leva will be hard hit. The federation says that a move that in effect will make people in lower income brackets be required to pay more tax is a negation of the Government’s promises to lower the tax burden for low and medium-income bracket earners.

What is not yet clear is what will become of a number of rebates. According to media reports purportedly based on leaks from those close to the debate about the new system, a number of tax breaks will be eliminated. Among these, again reportedly, is the rebate given to families with children. If this is true, it would in turn seem to be a negation of Government promises to ease the financial burden on those with children, a step that it undertook to encourage people to have children and so move against Bulgaria’s deepening demographic crisis.

So, as is usual, a flat tax is actually increased tax on the poorest in a community and a tax cut for the rich. There’s no surprise in that. Alvin Rabushka, who designed flat taxes, believes that the poorest in a country have a duty to support the richest within it. He’s told me so. See the quote from him here.

But there’s more to the paper’s objection than this. As it says:

It is well known that lack of tax compliance is a serious problem in Bulgaria. It is difficult to imagine that the cut in social security contributions, along with an effective substantial income tax reduction for higher-income individual earners, will be enough to encourage defaulters and those recalcitrant about being honest about their earnings to suddenly go over to the side of the angels.

Further, if it does prove true that the flat tax system will put an additional burden on lower-income earners, this may be a reverse incentive, for them to conceal whatever income they have.

It would seem that the flat tax proposal may not offer any guarantees of improved compliance, and in fact poses the risk of reduced revenue.

It’s conclusion? :

Before any further consideration is put into restructuring the rates of tax, the best course of action would be for the Government to devote energy and resources to ensuring that tax authorities have the will, capacity, skill and personnel to perform effective enforcement of tax compliance. This, along with a campaign to eliminate waste in public spending, and to be seen doing so, along with a positive campaign to explain the benefits of compliance, would seem to be essential actions to be taken before tinkering with any other aspect of the system.

Quite so. Flat taxes do not solve these issues. But they could make the problems much harder to handle.

Is the World getting flatter?

Flat tax Comments Off

Aug 022007

There’s a first rate article on flat tax in a Czech publication called TOL today. Adam Cardais says:

Karl Marx might be shocked to see who’s doing what with tax systems in Central and Eastern Europe these days.

After all, it’s the capitalist West that won’t abandon progressive tax systems, which Marx championed in The Communist Manifesto, while the former Soviet bloc countries are lining up to buck their old ideological fountainhead by moving to a more regressive structure: a single tax rate for nearly all earners, regardless of income.

It’s well worth a read. In particular I like this:

If, then, the flat tax is often nothing more than tax cuts in fancy dress, the resulting drop in revenues raises serious questions about how long governments can afford to embrace it.

A good question.