The age old flat tax debate appears to be rearing its ugly head again on this blog.
I said most of what I needed to say on this issue a decade ago in an ACCA funded report on this issue.
But let me reiterate three things.
First, flat taxes are not flat. All they do is eliminate the top rates of the one rare progressive tax most countries have, which is that on income. The result is that flat taxes create more regressive tax systems.
Second, flat taxes per se do not actually simplify anything. That is because they do not even charge a single rate of tax. They invariably have a nil rate band meaning that a person's income has to be split into bands to calculate the tax due. The only simplification, then, is to take out a higher band or bands, which effectively saves almost no time and effort at all.
Third, all the complexity remains in calculating what income is: it has to if injustice is not to result.
There is then just one reason for flat tax and that is to reduce tax on the best off by cutting the size of the state dramatically. How do I know? Alvin Rabushka, the man who created the idea, told me this in 2006 when researching the ACCA report:
The only thing that really matters in your country is those 5% of the people who create the jobs that the other 95% do. The truth of the matter is a poor person never gave anyone a job, and a poor person never created a company and a poor person never built a business and an ordinary working class guy never drove economic growth and expansion and it's the top 5% to 10% who generate the growth for the other 90% who pay the taxes to support the 40% in government. So if you don't feed them [i.e. the 5%] and nurture them and care for them at the end of the day over the long run you've got all these other people who have no aspiration for anything more than, you know, having a house and a car and going to the pub. It seems to me that's not the way you want to run a country in the long run so I think that if the price is some readjustment and maybe some people in the middle in the short run pay a little more those people are going to find their children and their grandchildren will be much better off in the long run. The distributional issue is the one everyone worries about but I think it becomes the tail that wags the whole tax reform and economic dog. If all you're going to do is worry about overnight winners and losers in a static view of life you're going to consign yourself to a slow stagnation.
As for the role of government he said:
I think we should go back to first principles and causes and ask what government should be doing and the answer is “not a whole lot”. It certainly does way too much and we could certainly get rid of a lot of it. We shouldn't give people free money. You know, we should get rid of welfare programmes, we need to have purely private pensions and get rid of state sponsored pensions. We need private schools and private hospitals and private roads and private mail delivery and private transportation and private everything else. You know government shouldn't be doing any of that stuff. And if it didn't do any of that stuff it wouldn't need all of that tax money so that's the fundamental position and as long as you're going to have government do all that stuff you're going to have all those high taxes.
As he also made clear, that then let's you have a flat tax. But in that case what I wrote for the Guardian in 2005 is true:
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.
That ‘social engineering' process is designed, as Rabushka himself say, to ‘take the tax code out of the economy'. In other words, it leaves people wholly dependent upon market forces. The consequence happens to be that politics is neutered on the way because as anyone who follows general elections knows, at the end of the day politics is about the economy. Rabushka and the right wing want to stop that. And if you don't believe me, John Meadowcroft who wrote for the Institute of Economic Affairs, a think tank Margaret Thatcher still supports, said in 2005 (or thereabouts) when asked if he thought democracy a ‘market institution' (when undertaking an interview on www.transformingbusiness.net but I cannot now trace the original link) that :
Democracies and free societies tend to go hand in hand. Having said that, democracy tends to lead to socialist policies, such as protectionism. If democracy leads to property rights and the rule of law, then yes, you need democracy. But otherwise, democracy is not a prerequisite for a market economy. Democracies tend to create very large states. In most European countries, including the UK, nearly half of GDP goes to the state. This is not good for the creation of free markets.
It seems fair to conclude that some in the mainstream the right wing now think democracy can be sacrificed to the market, and I believe that flat tax is part of that process. Which leads to the conclusion that two writers (Hettich and Winer) have put forward that:
“It is possible to have a flat tax, or to have democracy, but not both”
I concur.
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The last time we had rampant financial speculation, massive inequality, violent insurrections and social instability on a global scale it was decided that taxes on the rich and their corporations should be set at punitive levels in order to help correct the situation. It seemed to work quite well and the world became a more equal and peaceful world.
Now we have reverted to a similar unsustainable situation, perhaps it is time to re-try those previously successful measures again.
Instead of which some people continue to think regressive taxation is somehow going to deliver different results than in the past. The proof of insanity is repeating the same mistake and expecting different results – again and again and again!!
http://www.thecanary.co/2016/05/25/much-pay-tax-societys-richest-people/
A (high) flat tax with no nil rated band, plus a basic income, would eliminate your first and second points. I agree that your third point is a major issue though.
Shouldn’t Rabushka be spelled ‘Rubbishka’!
The notion the ‘poor people don’t create jobs’ is based on a grotesque misunderstanding of the realities of human interaction and exchange. Some of the greatest scientific, artistic achievements have been made in poverty. What ‘Rubishka’ means is that you need capital to create jobs which is quite different from his bald statement which implies all sorts of Malthusian and eugenicist notions. His mode of presenting his ideas reveal the obnoxious underlying attitudes. It’s ideas that create jobs and human idea sharing. The ‘entrepreneur’ picks up these ideas using capital but a great deal of collaborative effort is required prior to this.
Poor people are poor because they spend all of what little money they have.
McDonalds, CocaCola, KFC, Ladbrokes, Sky, NewsCorp, BAT, Tesco, Asda, National Lottery, etc etc would go bust in a week if poor people stopped spending.
The economy needs poor people more than it needs rich ones!
Mind you, Mr Shigemitsu, that list you provide might not support your case if that’s all we think ‘poor’ people do!
I suspect ‘Rubishka’ is conflating poverty with poor education, lack of culture, lack of creativity as he assumes that only financil rewards can flow in from any attainment in these areas. This indicates a mind that only see things in terms of their monetisation.
How can half of GDP go to anything? That statement doesnt make much sense if one considers what GDP is.
Doesn’t the UK already have a pretty flat tax rate anyway? If you add income tax plus NI, rates are fairly flat (32%, 42%, 47%). If you look at the fact that more higher income tax payers are likely self-employed or business owners, it gets even flatter as they don’t pay the employers’ NI side.
The main issue in the UK is really on the benefit side, where you get much bigger marginal rates which really are inefficient. The child benefit is a great example, where big families likely pay higher marginal taxes then high earners. I think some supporters of flat taxes are really unhappy about those distortions, rather than anything else. The idea that no marginal tax rate (including benefits removal) should exceed the top rate of tax seems reasonable to me.
Once you include benefit removal, it’s actually unclear we have a very progressive taxation system at all, so in some way flat tax supporters already have won to a large extent. Especially if you consider all taxes. So the only point that remains is really the redistribution level. I personally view marginal tax rates around the 50% mark totally acceptable. Raising them back to ’60 levels (80%-90%) would seem unfair to me. I guess 60% is really the limit.
Currently a highly paid salaried employee (which is likely bearing the employer’s NI side) is already very close to that 60% (he gets 53 / 113.8, plus probably pays another 4-5 in vat).
So I really only see extending those marginal tax rates backwards the only way to get more tax. I guess equalizing employed and self-employed distinction first though… Given that most benefits (health, security, etc…) are more or less fixed value, it would still be a big transfer from high earners to low earners anyway.
Your answers are in here
http://www.ons.gov.uk/peoplepopulationandcommunity/personalandhouseholdfinances/incomeandwealth/bulletins/theeffectsoftaxesandbenefitsonhouseholdincome/financialyearending2015
I looked at the numbers HMRC provides and I think they roughly support my statement: we already have a flat tax after a zero band.
If you look at table 2a, you get the following average tax rate.
Decile Income Tax rate
Bottom 4 467 -27%
2nd 7 824 -49%
3rd 11 420 -25%
4th 15 504 -8%
5th 22 976 8%
6th 30 362 20%
7th 37 947 25%
8th 49 021 28%
9th 60 063 31%
Top 107 597 33%
I would say these numbers are fairly consistent with a flat rate tax after the 12k zero rated band (which is more like a negative tax rate in actual reality).
In fairness, you’d probably need much more detailed information to really say that, as most progressivity is really in the top 2 deciles.
I calculated taxes as direct taxes + indirect taxes – cash benefits.
I also question the split somewhat. They are imputing a quite small percentage of employer NI to the employee (for example top decile is 4k employee NI and 1k employer NI, when I am pretty sure gross employer NI is likely around 10k).
Anyway the differences between 8th, 9th and top decile seem fairly small to me…
You are right
We do have a flat tax, in effect, with a dip at very top and a maximum at the bottom
Are high tax rates really unfair? The proportion of your income that is down to the efforts of others, i.e. Society, is probably something closer to 99.99% than 50%. For example even someone as unequivocally useful as a doctor would earn much less in the developing world than in the UK and virtually nothing amongst a lost Amazonian tribe. And that discounts the obvious fact that their education and training was funded by others in the first place. Virtually everything we are is self evidently down to the society we live in. In that light, letting high earners keep even 10% of their excessive earnings seems very generous to me. Of course there might be sound reasons to use money to promote high achievement but we as a society should look carefully at what we get for our investment.
Most professionals, me included, have included the benefit of the state granted monopoly that inflates their income in the UK and elsewhere
Well that’s really a judgement call. But unless you are going to force people to work, you need to leave some level of incentive. If I kept only 10% of any extra income I get, I am not sure I wouldn’t try to get some part time arrangement with my boss to halve my working time and halve my pay. I would definitely consider retiring much much earlier.
Personally I think your assessment is wrong though: I think the main reason doctors are paid more in a developed society is because people in developed society are more productive. A doctor helps you live a longer and healthier life: the value of this service must be related with the value you can generate in that life. If the only technology available to you is hunter-gathering, the total exchange value you create is small.
I agree societies helps individuals being more productive and I think that justifies taxes to some extent. But 90%? No, I don’t think that is really a reasonable estimate. I mean slavery is 100% tax rates.