With respect – your chart basically only works because of two flaws.

1 – your entire system only works because you use a very high tax-free threshold and so don’t compare like for like.
2 – your entire system only works because you use a very high tax-free threshold and so don’t compare like for like.

Now I know technically that is only one flaw, but it is such a big flaw I thought it was worth mentioning it twice.

Well, this is precisely why I like the Lib Dem policy of raising the tax threshold to £10,000 – something which will be implemented over the course of this parliament.

Now that’s REALLY interesting. Thanks.

As Don Paskini and I have pointed out on the original article, this has nothing to do with flat tax and everything to do with a tax free threshold for the poorest. A more progressive system than a flat tax with a large threshold is, er, a large threshold with higher bands above that for higher earners.

I would support a flat tax if it was combined with a tax on land values (or at least a progressive property tax). In fact, where flat taxes are used around the world, they are typically matched in that way.

George

It sums up why it was a shame Labour, having created the 10% threshold, didn’t have the ambition to extend that over time.

It was a very strong progressive move and it should have gone further. (reducing the basic rate would have been better replaced by extending the 10% rate)

That said – politics is about prioritising – and I’d trade all this for a lower rate of VAT. Indeed ideally that tax would be scrapped and replaced by something progressive and less costly to run.

The term ‘flat rate tax’ is completely meaningless. Conservatives wet their knickers at the mere mention of it. Yet, unless you specify what the rate will be it is a waste of time.

Let’s have a flat rate of 60%, scrap VAT, and see if the Adam Smith, bow tie wearing idiots like it. They will not, because they assume that the rate will be low. Flat rate is tory code for low income tax.

I’m a little confused by the working used here. Assuming you are ignoring all other tax, the point at which the current regime is better than the proposed 34% flat tax is surely about 17470.

17470 – 11000 = 6470*0.34 = £2199.80
17470 – 6475 = 10995*0.2 = £2199.

Isn’t it?

Interesting piece.

The fact that people earning pittace like £10,000 are still paying tax is nonsensical. Of course, it always pays to portray them as ‘benefit hungry, work shy’ buggers, never mind the fact that there is very little incentive to work under the current tax system.

Amaaaazing: for the ASI proposal for a flat tax is an allowance of £12,000 and a 33% tax rate above that.

Anyone would think we were deliberately going out to create a more progressive and fairer tax system or something. I dunno, the duplicity of these reactionary-capitalist-pig-dog-enemies-of-the-people.

The point of taxing the rich is not just to raise money or “punish” people. It’s to create disincentives to short term wage gluttony and equalise the distribution of income more evenly. More equal societies are healthier societies – just check your Gini index.

One can be against the silly notion of a “flat tax”, which as you point out penalises the middle class and assists the wealthy in increasing their share of the pie, while not defending the current system. The current system is not progressive enough, by a long stroke, but that doesn’t mean we should set up a flat tax.

Have you ever heard of a false dichotomy?

An iea pamphlet pointed out that, including indirect taxes, our current tax system is moderately regressive rather than progressive:http://www.iea.org.uk/files/upld-book394pdf?.pdf

Ironically, a flat tax even with a low earnings threshold could work out more progressive than currently if it accompanied reform on indirect taxes.

Nick

Hence my comment that I’d trade all this for a lower rate of VAT. Income tax is progressive and raises money cheaply. Few other taxes do that.

Or you could combine flat tax with a negative income tax (http://en.wikipedia.org/wiki/Negative_income_tax) which would probably be fairly progressive.

An iea pamphlet pointed out that, including indirect taxes, our current tax system is moderately regressive rather than progressive:http://www.iea.org.uk/files/upld-book394pdf?.pdf

So, if you include regressive taxes, our current system is more regressive than progressive? Yes.

I sincerely hope the abolition of VAT will be a rallying cry for the impending new political consensus.

“Hence my comment that I’d trade all this for a lower rate of VAT. Income tax is progressive and raises money cheaply. Few other taxes do that.”

That’s great if being progressive is all that you want from a tax system. However, there are other things to consider, such as the economics of taxation.

For example, we know very well that all taxes have a deadweight cost, that they reduce the size of the economy, both now and into the future (pleae note, what you then go and spend the tax on can increase growth more than the amount you’ve reduced it by taxing. Only looking at the effect of taxing here). We also know that different taxes have different such costs.

The general consensus is that taxes on property (yes, you LVT lovers!) have the least such effects and taxes on capital and corporations the greatest. The actual listing, as the OECD has calculated, is property, consumption, income, capital and corporation taxes.

So, as an example, if you reduced taxes on corporations at the same time as you raised taxes on property then you could have the same amount of revenue rasied but with a higher growth rate of the economy going into the future.

This rather clashes with the way in which taxes on income can be more progressive than taxes on consumption (ie, a progressive income tax is more progressive than a VAT).

But we could equally say that while getting the rich bastards to pay more tax is and important goal and other important goal is to make those in the future richer. Certainly it would be possible to argue that utility would be maximised by having more inequality now but higher incomes for all in the future (same thing as arguing for more growth). Indeed, we do argue this implicitly by not having a 100% wealth tax this year because we know it would entirely cock the economy next.

So, we’ve got to balance the desire for progressivity against other considerations (of which the above is only one). Which is why Chris Dillow and Worldwide Canadian Initiative keep pointing out that the Nordic tax systems are not progressive. They’ve got lower capital and coporation taxes than we do and higher VATs….although lower property and higher incomes taxes. They’ve made a different trade off to ourselves: sacrificing some of the progressivity of the tax system in favour of higher economic growth.

They are also higher tax in total than we are and it’s the effects of the spendiong of that higher revenue (on redistribution) which makes their overall systems more progressive than ours.

It does all get a little complicated, because you’ve got these very different things to trade off against each other.

Of course, if you really insist that we have a progressive tax system, tax system alone, then you end up hainvg to argue for a small State. Because there aren’t very many rich people and in aggregate they’ve not got a lot of money. So the amount you can collect in tax only from the rich isn’t very large and thus won’t pay for a large State. If you do want a large State then you’ve got to tax everyone meaning that there’s a real limit to how progressive the tax system can be.

Not a simple set of trade offs.

Bollocks.

A few teensy points:

1 – Redistribution from the middle to the top is surely regressive. So the tax system you describe is regressive in that respect.

2 – It’s simply not true that “everyone earning £20,000 or less (about 45% of working people) is better off under a flat tax”; those earning so little that they *already* pay no income tax (mostly part-time workers) aren’t better off at all. Nor, of course, are people on very low incomes that don’t come from ‘earnings’, but from benefits or pensions. All those people are, in fact *worse* off in relative terms; an effect compounded by the increase in the net incomes of the rich. Furthermore, among people who benefit from the system you describe, those who benefit most will be those who get the *full* benefit of the increased threshold (i.e. households with two earners on £11,000 plus); lower earners will benefit less.

3 – even if *was* progressive and/or desirable to sqeeze extra money out of mid-to-high earners in order to leave more in the pockets of low-to-mid earners and the rich, can you imagine trying to sell the idea of targeting the middle classes and only the middle classes to the electorate?

Basically this system has all the regressive features of the Lib Dems’ tax threshold rise (as detailed by the IFS), plus the ‘cherry on top’ feature of leaving the rich dramatically richer. It would surely lead to the most dramatic rise in inequality we’ve seen since Thatcher.

Wot GO said at 18.

And what is the effect on revenues?

“Redistribution from the middle to the top is surely regressive. So the tax system you describe is regressive in that respect.”

Sorry, you’re confused here.

There are two entirely different things to consider.

1) Who do we get the money from?

2) Who do we give the money to?

“Redistribution” is reserved as a description of 2). That we take less money from (for example, just as an example) the top 5% and take more from the middle 50% is not, not at all, the same as saying we will take money from the 50% to give to the 5%.

Thus to tax the rich less while taxing the middle class more is not “redictribution”. It’s a less progressive tax system at the top of the income distribution, sure, but it ain’t redistribution.

“Nor, of course, are people on very low incomes that don’t come from ‘earnings’, but from benefits or pensions. All those people are, in fact *worse* off in relative terms;”

You really want to rethink your logic here. The logical extension of what you say is that because those who don’t pay tax would be worse off by yet more people not paying tax is that such people who don’t pay tax should pay tax. And it’s very difficult indeed to believe that the lives of those on low incomes will be improved by Ed Milliband confiscating more of their incomes and deciding how that confiscated part should be spent.

“It would surely lead to the most dramatic rise in inequality we’ve seen since Thatcher.”

Err, no. For we measure (correctly) income inequality after the influence of both the tax and the benefit system. And, as above, the benefit system is hugely more influential on this than the tax system: what the money is spent on, not where it’s raised.

“And what is the effect on revenues?”

LOutside has deliberately set his rates so that, absent dynamic effects, the revenue would be the same. The clue is here:

“To raise the remaining £150bn from all those earning more than that you have to set the tax rate at 34%.”

Me? I think that dynamic effects would lead to higher revenues as a result of the change. But that’s different from what LO has assumed, which is that those are the rates required to gain the same revenue as the current system.

Lots of debate! Woo!

First off, oh joy of joys!, a pedantic snark at Tim.

“Worldwide Canadian Initiative” Ahem, are you sure you meant worldwide?

I’m sure you appreciated that, Tim.

I utterly reject the idea that progressive taxation is about keeping taxes low on the middle, it is about shifting the tax burden away from the poor. I can’t see why the middle warrant more concern than the bottom. Frankly no one has convinced me that today’s taxes are better than the above alternative, yeah, some in the middle are worse off than they otherwise would be, but that “otherwise would be” is poor people being taxed more heavily than is fair. (this is mostly directed at G.O and BenM)

Convince me people, use arguments and maths preferably, not ad hom if possible.

It’s simply not true that “everyone earning £20,000 or less (about 45% of working people) is better off under a flat tax”; those earning so little that they *already* pay no income tax (mostly part-time workers) aren’t better off at all.

Good call.

But then, none of them are really worse off. Inequality would be slightly higher, but not a huge amount, those earning the very highest incomes receive a reasonable portion of their income in forms which are not taxes as income (shares etc.), so the actual effect on inequality is harder to measure because the top 0.001% almost certainly wouldn’t pay much less tax, but a good portion of people in the 2nd to 4th decile would be taxed less. Difficult to quantify on the back of a fag packet as I am doing.

I would support a flat tax if it was combined with a tax on land values (or at least a progressive property tax). In fact, where flat taxes are used around the world, they are typically matched in that way.

Yeah, I could get on board with that. IMPORTANT BLEG, PLEASE READ: Are there any journal article length write ups of what would actually happen if a LVT were adopted in, say, the US or UK?

The point of taxing the rich is not just to raise money or “punish” people. It’s to create disincentives to short term wage gluttony and equalise the distribution of income more evenly.

Well we could exempt savings from taxation, like with ISAs but across the board, rather than increase taxation on income if you want to shift from consumption to investment.

I wouldn’t recommend doing that right now though: Paradox of thrift and all that. But it is an idea with some merit.

Tim,

Yes, tax structure. This is interesting isn’t it?

Brad DeLong summarises this matter quite well:

* Taxes on capital income and on the rich are to a substantial degree taxes on thrift and enterprise, which have powerful external benefits to everyone–and we would much rather tax thrift and enterprise lightly if at all.
* These taxes are paid by the rich, and if you had asked us before we were born, before we knew who our parents are going to be, before we knew whether we would be rich or poor, we would all have said we wanted taxes on the poor and middle class to be low and taxes on the rich to be high–the rich can, after all, afford to pay.
* These taxes on capital income and on the rich are to a substantial degree taxes on luck and on successful rent-seeking–and thus we want such taxes to be high.

I may be tempted to opt for more regressive taxes, if it were combined with much more progressive redistribution. (However, I don’t even think a LVT would be regressive, it sounds quite progressive to me [apart from towards fictional widows living in "'owses they've aowned aww ther' lives" in central London])

However, there is the policy ratchet to consider. The right (you) want regressive taxes and I assume neutral spending plus some absolute poverty reduction (so on net slightly progressive). The left want progressive spending and progressive taxation. If we concede on one, we may lose both battles and *poof*, you’ve (the right) won in a clever feint and strike, the left are set back a generation.

Right, already a long enough comment. Anything/anyone I’ve missed? I’m opening some wine now, so later comments will be swearier/less cogent, but still worthwhile.

Argh! I’ve not even opening the wine yet and I’ve fucked up. Fucking html, I thought it was foolproof? What does that make me?

following “income more evenly.” please read as though I could use blockquotes like an adult. If someone with the ability to edit comments comes through can you please add a / just after the < following "income more evenly."

Thank you all.

@ Tim:

“It’s a less progressive tax system at the top of the income distribution, sure, but it ain’t redistribution.”

OK, fair point on the meaning of ‘redistribution’. What’s being ‘redistributed’ here, I suppose, is not money from the middle to the top, but the burden of taxation from the top to the middle. Still boils down to the middle being made worse off and the top better off, though, so – as you say – still less progressive.

“You really want to rethink your logic here.”

I’m not sure there’s any logic by which it could fail to be true that if you make people in the 2nd, 3rd and 4th income deciles better off (say), but allow the incomes of those in the 1st decile to stand still, those in the 1st decile will be left worse off in relative terms. Are you aware of the analysis of the distributional effects of the Lib Dem £10,000 tax threshold rise done by the IFS and Left Foot Forward? Same points apply here as far as I can see:

http://www.leftfootforward.org/2010/04/lib-dem-tax-policy-%e2%80%9cfails-the-fairness-test%e2%80%9d-ifs-says-so-too/

“The logical extension of what you say is that because those who don’t pay tax would be worse off by yet more people not paying tax is that such people who don’t pay tax should pay tax.”

Yes – logically, if you lowered the tax threshold from £6500 to £5000, say, people earning £6500 or over would take the biggest hit (paying tax on an extra £1500 of income), people on incomes between £5000 and £6500 would take smaller hits the lower their incomes, and people on less than £5000 wouldn’t be hit at all and so would be left better of in relative terms. The overall distributional impact would be to reduce the income gap between the bottom and the middle, hence promoting equality.

But one can consistently believe both that we shouldn’t be doing that – pushing the incomes of low-to-mid earners down towards those of the very poorest is just the wrong way to promote equality! – and also believe that we shouldn’t be promoting further *in*equality by pushing the incomes of low-to-mid earners up away from those of the very poorest. Truly progressive measures would be ones that benefitted low-to-mid earners generally, but the poorest most and the best-off least.

“Err, no. For we measure (correctly) income inequality after the influence of both the tax and the benefit system. And, as above, the benefit system is hugely more influential on this than the tax system: what the money is spent on, not where it’s raised.”

OK, maybe not as dramatic as I think then! But surely this would have the effect of pushing up both the median income and the incomes of the top 5% or so quite sharply, while leaving the incomes of the bottom 5% or so largely unchanged (thus increasing both the gap between the bottom and the middle and the gap between the bottom and the top)? I’d be very curious to see the numbers crunched.

@ Left Outside:

“I utterly reject the idea that progressive taxation is about keeping taxes low on the middle, it is about shifting the tax burden away from the poor. I can’t see why the middle warrant more concern than the bottom.”

Sure – but those at the *very* bottom – those too poor to pay income tax even now – *do* warrant more concern than the low-to-mid earners just above them on the income scale.

“But then, none of them are really worse off.”

Two points -

1 – That just doesn’t seem like much of an answer. Making things better for the very poorest should surely be the primary goal of a progressive system; they should be a higher priority than people on more average incomes. So just leaving them no worse off isn’t much of an achievement.

2 – If this system would substantially boost the incomes of low-to-mid earners (those in the 2nd to 4th deciles, say), I don’t see that there’s any way round the fact that the incomes of those who *didn’t* benefit would be left substantially further behind the incomes of those people than they already are.

And again – the big problem with calling this system ‘progressive’: it’s one thing taking more money from middle earners so that the *poor* can pay less tax, but when you then take yet more money from them so that the *rich* can pay less tax too… I just don’t see how that can be justified.

That DeLong bit is good….however, do note that he’s talking about capital taxes and taxes on the rich….not corporation tax. Further, that he’s not making the adjustment of being in an open economy.

The incidence of corporation tax is counter intuitive. Depends upon hte freedom of movement of capital and in the long term, in an open economy like outs, is largely bourne by labour. The workers in the form of lower wages. Quite how much is is a matter of debate: empitical estimates for the UK run from 70% to over 100% of the incidence being carried by the workers.

So if corporation tax is not actually a tax on the rich bastards who hold shares then we shouldn’t treat it as a tax on rich bastards.

To a lesser extent this also applies to other taxes on capital. This is part of the reason that the OECD identifies them as having higher deadwieght costs.

Then of course we do need to consider the Laffer Curve. It does exist, just depends upon where the peak revenue point is. Both R. Murphy and Red Ken have made proposals that would take us over (well, OK, almost certainly take us over) that point, at 75% and 80% respectively.

G.O. makes a good point about the income in relative terms being important. The supply of plenty of things (housing, for example, to take one I at least know something about) is relatively fixed. Your ability to access housing is not really determined by the absolute amount of money you have, but by the amount of money you have relative to other people locally.

If you have a vast level of inequality in a particular area, you see poorer people being pushed out to make way for summerhouses for the rich, inhabited a couple of weeks a year, while the cost of basic entry-level housing spirals ever upwards. Indeed, we do see that already. For an extreme example, look at the market in tourism-affected parts of Norfolk or indeed inner west London. Places with very different prices, but a very similar problem with unequal access to housing.

Tim

There is something of a problem with the OECD analysis, though were we addressing a simple rise or fall your view would be valid.

There is no administrative cost in raising VAT to 20% in the UK. Or at least very little. The civil servants who have to calculate it and chase it and assess returns continue to do so unchanged from 17.5%. Likewise the companies that have to calculate it and submit returns do so at 20% with no additional workload burden than at 17.5%.

However – There is a massive massive administrative cost in the first 1% that never goes away. VAT is a very costly tax and although government pays only a tiny proportion of that cost, the cost being done met by companies is no less an influence on on the deadweight cost.

That means that while the deadweight cost of raising VAT from 17% to 20% seems not to be very big, the deadweight cost of raising VAT from 0% to whatever percent is much much larger.

Hence my view that reducing it is not as valuable as eliminating it.

Doesn’t the EU determine minimum rate of VAT?

@Tim: could you please go back to being a moustache-twirling all-weather villain please? I come here to hate, not to think. Cheers.

Thanks to the OP for an eye opening article and to commenters for such erudite discussion. My own thoughts main centre around whether VAT is, or ever has been, a good or fair way to administer taxation (given that we live in rip-off Britain and food/fuel prices are only going to rise).

Gwyn,

A simpler way to look at the question is this: is a system of taxation on transactions (thereby artificially increasing the cost of almost everything) a good idea when the money could be raised by simply taxing income? I still do not understand how any sort of complexity in tax systems does anything but escalate costs (which admittedly generates more tax, but presumably only enough to cover the added costs to government).

28. cjcjc

‘ Doesn’t the EU determine minimum rate of VAT? ‘

The EU determines that the VAT standard rate must be a minimum of 15%. Some goods and services can be zero-rated and others charged at a reduced rate.

Could you please clarify, Mr or Ms Outside, whether the Flat Tax idea you propose is outwith of Tax credits, Child Benefit and all other Lifestyle needs assessment, and – at the other end of the scale – Capital Gains/Land and Inheritance tax?

Because I can see some merit in the idea, provided its not the only lever the government has to manage the tax system according to needs and means.

oh for god’s sake, as many have pointed out, all you are saying is that it would be more progressive to raise the threshold, and raise taxes on everyone – that’s nothing about flat tax.

In truth, raising the tax threshold is a very expensive way of helping the poorest – you are better providing services collectively which people couldn’t afford individually at the market rate. If you raise the threshold, you give this portion of income free to everyone – so most people who get the money are the rich. I have no problem with universal services, as long as the wealthy have them taxed back off them to pay for them, but that is not what you are proposing.