The age old flat tax debate appears to be rearing its ugly head again, stirred up yesterday by Boris Johnson who praised those states like Romania that have them as exemplars of good practice despite the massive tax abuse in such countries and the enormous social issues that they seem to face, none of which seem to have been tackled by flat tax.
I said most of what I needed to say on this issue more than a decade ago in an ACCA funded report. I recommend taking a read: nothing has really changed. 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.
Boris Johnson needs to be asked which one he wants.
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Rabushka’s whole thesis about the process of wealth creation, and the right to rewards that flow from that process, is directly rebutted by Nick Hanauer, a member, as he himself says, of the 0.01%
See https://youtu.be/q2gO4DKVpa8
If the economy is an organism, every component matters, and every component deserves reward, and Rabushka is talking pure – very self-centered – bilge.
These proponents of small government, where everything is “private” should try living in a State where that is nearly true, like Somalia, where “private” means gang warfare.
One hopes they would change their tune, but I fear they would only display a Panglossian response, and insist everything was fine, as they descended further into chaos.
The self-deception of the Rabushkas of the world constitute the modern world’s eighth wonder, and it’s not a pretty sight.
The interview with Rabushka was what I might call ‘an experience’
I thought Margaret Thatcher was dead? How can she still support a think-tank?
It was her favourite think tank
Oh for a sub-editor
Andrew, the difference between Hanauer and Rabushka is that Hanauer understands demand-side economics and Rabushka doesn’t.
That and the fact that Hanauer doesn’t pretend to be an intellectual or academic.
The fact that Boris Johnson thinks you can meaningfully compare tax systems in western European countries with those in post-communist ones (with their much higher levels of equality, home ownership and low personal debt) is just a sad reflection of this government’s intellectual capacity and its inability not only to tackle the issues but identify them in the first place.
Why do these off-the-wall right wing zealots never produce clearly articulated arguments backed up by sound reasoning and evidence? All we seem to get is self-serving opinion.
As far as going back to basics we cannot let them circumscribe the extent of the conversation; so we need to ask more fundamental questions such as, What kind of society do we want? I suspect most would like one which is much fairer and more equitable than what we have at present.
(if 95% really would like to be reduced to penury so that the 5% can capture most of the wealth and rule the world, then fair enough – I shall prefer to fall on my sword and hope to make a better job of it than Cato, who did himself more harm than good)
Then we can start talking about how to achieve a fairer society and what sort of government we need to enable us to get there – one that get rid of self-serving clowns and puts the people in charge. And yes, that would be social engineering, but engineering to enhance the lives of all and not just a select few.
Unfortunately, the right have captured not just the wealth but the debate (if it is a debate) and it is framed entirely from their perspective, such that the rest of us are merely fire-fighting.
“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”
This is a very bizarre statement even for an extremist. We all know that many companies were built by people that started with very little whether the market stall holder:
https://en.wikipedia.org/wiki/Jack_Cohen_(businessman)
the student
https://en.wikipedia.org/wiki/HP_Garage
or a hitchhiker living a simple life in a cabin trying to save for a trip to India
https://en.wikipedia.org/wiki/Steve_Jobs
Charles
Rabsuhka is from the school that has never let evidence be an impediment to dogma
Richard
I’d never heard of Alvin Rabushka – so I had a quick trawl – and found this very interesting except from an interview with the SAST (1999 I think) especially his thoughts on Tony Blair.
http://sastreport.x10.mx/ra.html
SAST REPORT: Mr. Rabushka, does there have to be a change of government in European countries before the flat tax can be implemented?
RABUSHKA: Oh, I think you’ll have them. I think you’ll have them.
SAST REPORT: In your opinion, is it also possible, in Germany for example under a Socialist government, to completely change the tax system and bring about a flat tax?
RABUSHKA: But remember, they’re all, they’re all, you know … – Tony Blair is a New Labour, and Schroeder is a New Socialist, and the French are New Socialists. So, I think, even Bill Clinton was New Democrat, so what’s happened, is, there is no longer any Left in Europe. The Left has gone. The Left has moved into the center. And there’s not much difference now between the sort of: ‘Here’s the old regime: and here’s the Left, here’s the Right. Now: here’s the Left and here’s the Right.’ And there’s not much difference. And I think what you are going to see: It doesn’t matter whether you have a Left government or a Right government, they are all economically going to have respond to the changing patterns. So whether or not you replace the current German government with a new government, I would say ten years from now, if you look at the economic policies, you will not be able to tell whether it was Kohl or Schroeder who was Chancellor.
SAST REPORT: Mr. Rabushka, has Chancellor Gerhard Schroeder shown any interest in the flat tax proposal?
RABUSHKA: Not yet. [laughs] We have sent him a copy of the book.
SAST REPORT: And Prime Minister Tony Blair?
RABUSHKA: Tony Blair – interestingly enough about Tony Blair: He is tougher on welfare than Bill Clinton. I have a friend who is an expert in British politics and he knows most of the British politicians. And he showed me a letter which he got from a friend of his in the Labour Party and he says: “There’s Tony Blair. And underneath that Labour skin beats a Conservative heart: cruel, mean, vindictive.” So that in his view Tony Blair really isn’t Labour. The reason he’s the Prime Minister is because he had no opportunity in the Conservative Party, so he moved into the Labour Party, took it over and changed the Labour Party. So, it’s really another Conservative Party.
Rabushka got that right
Oh Martin,
That’s gold!
A flat tax does not work because it does not stabilise the distribution.
See http://www.progressivepulse.org/economics/poisonous-tendencies/
This is quite fundamental regardless of any political views. If you do not apply stabilising negative feedback then systems blow up and bring everyone down as we saw during the first half of the twentieth century. The choice is between stability or destruction.
Agreed
Charles wrote: “The choice is between stability or destruction.”
Except where ‘stability’ is defined by our current “strong and stable” government and turns out to be destructive. Orwell lives!
Richard you may be pleased to learn that I have a cunning plan to test the veracity of Rabushka claim that the 5% produce all the wealth
whilst the 95% should be gratefull for what they get. We let the board of directors (BOD) occupy the factories, stores and offices of their companies and send the workforce on holiday (think British Areospace et al). After say one month we reverse who goes where and send the BOD on holiday and let the workforce resume their normal duties. I expect that the ratios of output would be 99.9999% workforce as opposed 0.0001% BOD. I am airing on the cautious side so I may be too generou to the BOD. If we also add the major shareholders in the mix I would not expect the ratios to change that much. This would give us a very basis for deciding on compensation when the British Public decide that Capitalism has outlived its sell by date.
I like it
Ultimately it is neither the worker, manager, investor or entrepreneur that “creates jobs”.
It is the consumer. If they don’t buy the others don’t eat, and the more income that the broad mass of consumers have, the better. Rabushka either doesn’t get that or isn’t letting on. He belongs to that lunatic Ayn Rand fringe that emerged out of the Cold War.
At any rate this whole idea of “creating jobs” is ridiculous. Listening to idiots like him anyone would think that plutocrats invented the concept of work while the rest of us sat around waiting for their instructions.
The rich just can’t bear the truth of the fact that they are just as expendable as anyone else.
So good old, friendly, fumbly-bumbly, charming, harmless-looking Boris once again reveals what an old-school, silver-spoon, born-to-rule, nasty, far-right putz he really is.
Rather than a flat tax I’d rather see Boris flat on his face to be honest.
With the rest of what must be the most dysfunctional group of politicians (ideologically and functionally) I have ever seen in power in this country.
I’m 100% behind a “flat tax” regime that extends to levying an annual wealth tax t the agreed rate.
But somehow, I suspect the idea may fall, er, flat!