According to the Guardian, Kemi Badenoch said yesterday that a flat tax rate is an “attractive idea”.
A flat tax is a far-right obsession on which I did a lot of work around 2006, including visiting Eastern Europe to discuss the issues at IMF-organised meetings, which had the very obvious goal of trying to prevent flat taxes from happening. I came to some very obvious conclusions, which I summarise in this blog, first written in 2016, but I have no reason to alter much of it now:
The age-old flat tax debate appears to be rearing its ugly head again.
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 lets you have a flat tax. But in that case, what I wrote for the Guardian in 2005 (not available online) 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 on the right-wing now think democracy can be sacrificed to the market, and I believe that a 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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I have heard of the flat tax rate being part of the proposal for a universal basic income – all earnings on top of the UBI being taxed at a flat rate. I’ll leave it to you to discuss the merits or otherwise of such a proposal. The right just latch onto the flat tax rate and forget about the UBI as Badenoch is now doing. Before she got into power Merkel was fond of flat tax rhetoric which she subsequently dropped.
“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”.
This is important. In Britain democracy is a relatively recent innovation. What is far more important in the British political tradition than democracy, is property. This goes back to John Locke. The place of ‘property’ as prime; more important than democracy possesses a strong hold over a large swathe of the British population, and accounts for a larger proportion of the most influential, and the wealthiest. That is just a brute fact. Unlike Locke they no longer promote ‘property’ itself, but ‘market forces’ (but it is just a stalking horse for property). ‘Property’ is politically more fundamental in the British history of ideas than even intellectual historians seem to realise.
Thanks
Thanks for the detail of flat tax ideologies, it was most illuminating. The whole concept of flat tax and tiny ineffectual governments sounds like Ann Rand stuff on mega steroids to me. Nasty wee people.
[…] By Richard Murphy, part-time Professor of Accounting Practice at Sheffield University Management School, director of the Corporate Accountability Network, member of Finance for the Future LLP, and director of Tax Research LLP. Originally published at Fund the Future […]
If we are to return to a politics of “first principles”, then what are these principles and where can I find them? Any ideologue can claim to be “first” and to have special communication with a principle power.
He is right that politics has abandoned normative values. We no longer discuss the actions that we should be doing (or hope to occur) in response to events that have happened. It is all about what is necessary and prescription at every turn.
A flat tax is a prescription looking for a problem that doesn’t exist.
All Alvin Rabushka has expressed is an opinion that has no factual basis in human history.
It is a minority view that has crudely bought itself into pre-eminence – not because it is true.
‘First principles’? The first principle is human beings organising themselves for survival , sometimes loosely, sometimes more pro-actively.
This is simply the rich remaking the world in their image.
We did not become best buddies
I think you can guess why
The problem with Rabushka’s Monte Pelerin perspective, is that he sees the world as a desert wasteland in which there is usable labour freely available for the 5% to dip into (and out of) at discretion, to provide the 95% with work for the purposes of the 5%. The fact is that, largely they also have to sell to the 95% to make it work ( and whoever and however many others may be left out of the work force). There is also the expectation of the 5% that they receive a free lunch for supplying this service. The lives of the 95%, save as a source of labour for the 5% ,of no interest to or responsibility of the 5%, save as investing employers; even though they are dependent on the 95% to operate, or do anything at all. There are no costs, no entry fees, no exit fees, for using the wasteland: all in the free lunch package. Both American and British cities possess the scars of industry the 5% walked away from, leaving nothing but wreckage, pollution and social toxicity behind. Babushka thinks they start with a wasteland; the problem is – they start with people, and end with a wasteland; time after time, after time. It never ends well.
The real meaning of the critical, inherent and necessary reciprocity of the arrangement of work Rabushka misrepresents, and is completely lost on him, because to recognise dependence on the 95% for both labour and a “market” (rather than the 95% on them) undermines the ideology. It is essentially incoherent. Rabushka thinks neoliberalism is a form of commercial solipsism, with a free lunch thrown in, and no strings attached.
Thanks, John.
“Both American and British cities possess the scars of industry the 5% walked away from, leaving nothing but wreckage, pollution and social toxicity behind.”
The chef Anthony Bourdain in his ‘Parts Unknown’ series, made some great episodes in North America exposing exactly this point. He visits various cities that the capitalists abandoned when their profits dwindled with no accountability for the people who created their wealth.
Detroit comes to mind
A so- called flat tax has been a rightwing wet dream for decades. After their election disaster I was certain that the Tories would lurch hard right and this is more proof.
Be in no doubt that if Badenoch were to run with this deeply reactionary policy she would have 100% support from rightwing media.
Flat tax is billed as a simplifying issue and a fairness issue. Odd then that these folk have not embraced Wealth Report suggestions about equalising income and CGT tax, or tax rates between earned and unearned income.
Not odd really… we all know what their agenda is.
Well put
“Bad enoch said yesterday that a flat tax rate is an “attractive idea”.
Why would anybody with two neurons to rub together think that anything emanating from bad enoch is even worthy of consideration?
She is a neo-con/libtarde imbecile. It is more worthwhile to discuss Strictly Dancing – in terms of philosophy – I’m not offering a point of view – but reality.
My favourite flat tax was the pole tax.
That went down well!