Tax Research UK

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

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.

Richard Murphy Economics, Ethics, Flat tax, Tax management

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.

Richard Murphy Ethics, Flat tax, KPMG