The Flat Tax
Tonight's seminar was Alvin Rabushka, "intellectual father of the flat tax", at the IEA. A fluent (though not compelling) speaker, he defends the economics and morality of the flat tax with a very American optimism. Having advised both Republicans and Democrats in the past, he's now working with President Clinton's former economic adviser in an attempt to set Mrs. Clinton's agenda for 2008.
The common question for flat tax proponents is "Why should a factory worker pay the same percentage as the factory owner?" Alvin gives the following response: Since the owner pays (say) 10x the absolute amount that the worker pays, on account of a higher income, what is it that makes you want to take an even higher rate from the owner - 20x or 40x the worker's absolute amount? Alvin is clear: proportionality is unfair.
So, if there's a low-ish flat rate - Alvin likes 15% - then a whole bunch of people who are dissatisfied with progressive rates will start to pay tax: the rich! They have the best advisers and, in practice, currently pay far less than they should. It's hard to argue that's fair. A flat tax on personal and corporate income, with no loopholes and (this bit is important) no capital gains tax, would give the rich no option but to stop hiding and pay up. It would also kill a whole industry of tax advisers and simplify investment decisions for businesses.
There's some appeal in this argument. (Though no-one buys Alvin's claim that 95% of the Inland Revenue would disappear overnight!) Alvin's other defence for "fairness" is a bit subtler. He says you can't claim that a flat system is "unfair" unless you can identify a "fair" progressive system; but that you can't do that because the 150 progressive systems around the world change all the time. As soon as you find a system you consider "fair", it'll inevitably be tweaked by politicians. He also has a whole argument that current tax codes "violate every norm about anti-discrimination", but I won't go there :-)
Someone pointed out that people don't really pay the same rate in a flat system, because their effective tax rates differ. A worker earning 20K with a 10K allowance and a 15% flat rate only has an effective rate of 7.5%; a manager on 40K has an effective rate of 11.25%; a CEO on 150K 13.75%. You only tend towards paying 15%, and pay a lot less at the bottom of the income scale.
Maybe, if the public thought in terms of effective rates, they might accept a flat tax. Some of us loved Alvin's idea that everyone should get a form annually showing their total tax payments for the year: income, NI, VAT, council, everything. Now that would be transparent government.
(And it won't happen for the same reason that Easymobile provide a total pre-pay cost but not a total count of used minutes. If you could easily work out how much a minute costs, you could be tempted by a headline per-minute rate from another provider. And knowing that you earned 30K but paid 17K in tax could make you quite upset.)
Overall, I appreciated the importance Alvin attached to "political balance" in promoting a flat tax. But I still don't buy that the countries who've adopted flat taxes, like Estonia and Slovakia (19%), are comparable to the UK. I'm not saying we wouldn't benefit from a simpler or even flat tax system, but just because Slovakia got a big net boost from it doesn't mean we would.
The common question for flat tax proponents is "Why should a factory worker pay the same percentage as the factory owner?" Alvin gives the following response: Since the owner pays (say) 10x the absolute amount that the worker pays, on account of a higher income, what is it that makes you want to take an even higher rate from the owner - 20x or 40x the worker's absolute amount? Alvin is clear: proportionality is unfair.
So, if there's a low-ish flat rate - Alvin likes 15% - then a whole bunch of people who are dissatisfied with progressive rates will start to pay tax: the rich! They have the best advisers and, in practice, currently pay far less than they should. It's hard to argue that's fair. A flat tax on personal and corporate income, with no loopholes and (this bit is important) no capital gains tax, would give the rich no option but to stop hiding and pay up. It would also kill a whole industry of tax advisers and simplify investment decisions for businesses.
There's some appeal in this argument. (Though no-one buys Alvin's claim that 95% of the Inland Revenue would disappear overnight!) Alvin's other defence for "fairness" is a bit subtler. He says you can't claim that a flat system is "unfair" unless you can identify a "fair" progressive system; but that you can't do that because the 150 progressive systems around the world change all the time. As soon as you find a system you consider "fair", it'll inevitably be tweaked by politicians. He also has a whole argument that current tax codes "violate every norm about anti-discrimination", but I won't go there :-)
Someone pointed out that people don't really pay the same rate in a flat system, because their effective tax rates differ. A worker earning 20K with a 10K allowance and a 15% flat rate only has an effective rate of 7.5%; a manager on 40K has an effective rate of 11.25%; a CEO on 150K 13.75%. You only tend towards paying 15%, and pay a lot less at the bottom of the income scale.
Maybe, if the public thought in terms of effective rates, they might accept a flat tax. Some of us loved Alvin's idea that everyone should get a form annually showing their total tax payments for the year: income, NI, VAT, council, everything. Now that would be transparent government.
(And it won't happen for the same reason that Easymobile provide a total pre-pay cost but not a total count of used minutes. If you could easily work out how much a minute costs, you could be tempted by a headline per-minute rate from another provider. And knowing that you earned 30K but paid 17K in tax could make you quite upset.)
Overall, I appreciated the importance Alvin attached to "political balance" in promoting a flat tax. But I still don't buy that the countries who've adopted flat taxes, like Estonia and Slovakia (19%), are comparable to the UK. I'm not saying we wouldn't benefit from a simpler or even flat tax system, but just because Slovakia got a big net boost from it doesn't mean we would.
posted by Alex Buckley at
11:46 pm
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