Tuesday, September 13, 2005

Flat taxes and simplicity

There's been a fair amount of good stuff on this in the press and on various blogs, a number of which are rounded up here and also here.

The flat rate tax system, kindly explained to me by this gentleman in his comments box, is one where a single rate of tax is charged on everything - income, corporations and goods at the point of sale. Experimented with in post-Soviet Eastern Europe, the idea appears to be catching (although notably with a lot of people who don't seem to have won many elections recently).

Personally, I do not think a left-wing case can be made for this, as Jarndyce argues in this piece. I don't understand why this essentially (if my memory of university serves me - and I confess it often goes AWOL on these occasions) monetarist idea has become the new chic. It reminds me a of the big shoulder pad/leg-warming craze of the same decade: struck a lot of people around me as a good idea at the time; didn't buy it then and I really think people now should confess it was all a bit embarassing...

Seriously, I think in particular the virtue of it's simplicity is overrated. I'm not indifferent to this when it comes to the administration of a government's tax/benefits policy. In a previous incarnation, I was an indifferently trained and radically underpaid welfare rights officer. When we got queries about pensions, it used to make my head hurt and I often had to go and lie down for a while, such is the tortuous complexity of our system.

If you imagine that the Iron Lady heroically scythed through a jungle of red tape astride her white stallion, liberating the huddled masses of the virtuously thrifty middle income earners from the lumbering leviathan of the state-system, I've got some dispiriting news: it was largely due to her changes, and the way they interface and overlap with the pre-existing state insurance-based system, that were largely responsible for the confusion. Very difficult to measure confusion and put a precise figure on how much one head hurts - but I reckon a conservative estimate would put it at around five times more confusing, and that's very confusing. (I'm using the length of time I had to lie down as a rough guide here. If you've come to this site looking for a statistically rigorous analysis of the issue, I'm afraid you've been misdirected.)

What she unquestionably did make much simpler and easier to administrate (and explain) was the benefits system, excluding pensions. It's not that removing some of the absurdly complex web of varying criteria for recipient to claim obscure benefits for incontinent household pets and the like wasn't welcome from an administrative point of view - but I don't think it did anything to advance social justice at all. On the contrary, the system became more parsimonious and had a couple of build-in mechanisms that permitted claimants to receive less money than the government by it's own definition deemed sufficient to sustain a decent minimum living threshold. Moreover, any supposed dividend resulting from less bureaucrats has been conspicuous by its absence.

The problem with the notion that the flat tax would simplify things is that it is simply wrong. The complexity of the above mentioned pensions mangle, for instance, had (has) nothing whatsoever to do with the fact that income tax or corporation tax is paid at different rates and everything to do with the number of different agencies that interact over the provision of welfare. There is not the least doubt that both Thatcher and Major, and now Blair, have greatly added to this problem.

Furthermore, a flat tax would not even render neutral what is already a regressive tax regime in this country. Jarndyce is right to say, "our tax system might be tagged 'progressive', but it is in name only" - although one could add both that those who describe it thus are simply misinformed, and that to think a flat tax would rectify this is wrong. The regressive nature of our tax system is due not to the existence af varying rates of income tax but to the balance of the government's fiscal take between those taxes that are instrinsically regressive - namely, those levied on consumption - and those which can be progressive, like income and corporation tax.

If the current balance was left in place and a flat tax were to be introduced, the overall effect would be to make it even more regressive. It would clobber the poor and middle income families in Britain. The only conceivable way they could end up with more post-tax income would be if the total government take of the national income were cut quite deeply. What to do with all that extra money? I'd get some health insurance if I were you - assuming you can afford it, that is.

This of course is the agenda here - and please don't fall for the rather flimsy leftish justification that a flat tax, because of its simplicity, would result in rich capitalists being unable to exploit loopholes in the system. Multi-nationals can avoid tax largely because of their ability to move their funds and production elsewhere if necessary. To the extent they're likely to favour a country with a flat tax, I'd suggest this would have nothing to do with the simplicity of the tax regime; only that they expect to pay less under it. This would be the cause behind any reduction in tax-avoidance: the taxes are no longer worth avoiding.

Moreover, while it would be nonsense to deny that varying tax rates can and are exploited, it does not follow that therefore these variances should be abolished. One such variance exploited by unscrupulous employers, for example, is the point around which it goes from zero to 10%. Is it being suggested that this should be resolved by ensuring the first pound that any worker earns is taxed at the full rate? It's like the benefits system argument: I never quite understood how people justified the idea that an entire welfare system should be dismantled simply because some people have learned how to defraud it.

If the flat tax was to be consistently applied, it would mean a radical reduction in the price of alcohol and tobacco. Splendid for me certainly but I'm getting to the fogeyish stage where I worry about the nation's youth following my sorry example. At present, the average 15 year old has to struggle along with the odd ten-pack of Mayfair cigarettes (rank - taste like the manufacturers fill them with old socks and stuff) and a couple of those sugar-alcohol fusions that glow like radiation. Post- flat tax, they'll be puffing their way through Havanas and swilling Chivas Regal on a daily basis (more likely, they'd just buy more Mayfair and buckie).

And if there are to be exceptions - on what basis? Wouldn't that just complicate things?

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