the Flat Tax and British mentality

According to Allister Heath:

Remarkably, the UK Treasury’s model of the economy, as well as those operated by private think-tanks, assume that if the top tax rate were to double from the current 40% to 80%, revenues would also double and taxpayers would not modify their lives in any way, choosing to work almost for free for Brown.

Unlike the Treasury, you and I wonder how a change in tax will alter our incentives - we know that our behaviour changes in response to stimuli.

Boston, 1773, after the Tea Tax | London, 1990, after The Poll Tax

In the US individuals have to file their own tax returns, therebye calculating for ourselves the exact amount of income tax we're required to pay. In the UK, by contrast, since employees withhold income tax directly we only start dealing with amounts if we request a rebate.

Sales tax has a similar level of transparency. Does anyone in the UK know how much VAT they pay a year? Obviously it's 17.5% of consumption (albeit only for luxury goods such as tampons), but we never really see it. In the US the price on a label is net, so you only see the full price (including sales tax) at the till. Initially this is annoying for Brits - we don't know how much something costs! But this very system makes consumers keenly aware of the level of tax we pay.

Although it's true that America was founded on a tax revolt, I don't think that American's are fundamentally more tax-averse than Brits. Rather the ways in which they pay tax make them more tax aware.

We too have a tradition of tax revolt, in fact it's a contemporary issue - from the Poll Tax in the early 90s, through the Fuel Protests in 2000 and up to the current groundswell over Council Tax. It's important to realise that Council Tax is a far lower outlay than many other forms of taxation, but it is a bill we receive, and is therefore transparent. Like gas, electricity or phone service we're conscientious about how much we're spending and want value for money. Unlike income tax or VAT we write a cheque and know the full amount.

Although tax protest is typically portrayed as a middle-class issue (and therefore unimportant), tax reform should be high on the public agenda. If you currently think that our present system is "fair" because the richest pay more, then i'll make two points:

1. If Mr A earns 10 times as much as Mr B, how much more tax is a fair amount to pay? To me, "10 times as much" is the only answer that doesn't seem arbitrary.

2. If you've ever been to Jersey, Guernsey, the Bahamas, the Cayman Islands (etc...) then do you think that those exemptions and loopholes keep people within the system, or do they allow those (who can afford expensive accountants) to escape it?

These issues arose at a dinner I attended last night, and underline an important lesson in politics: nothings impossible, and frames matter.

Comments

[Joe Otten]

Damn, I was about to vote for that party promising to put the top rate up to 80%.

Why don't these people ever talk about realistic tax proposals rather than straw men.

Incentives are affected most by the amount of money retained, rather than the rate, so a cut from 80% to 40% triples the incentive. A further cut to 20% only increases the incentive by a third.

Would an 80% rate double the revenue? No. Would a 20% rate halve it? Probably not far off.

[Joe Otten]

Oh, one other thing. A sudden £60bn tax cut is classic "supply-sider" stupidity. We need stability not fiscal recklessness.

There are good arguments for making the system flatter and simpler, but nothing to trump the usual reasons for fiscal soundness.

[Jim]

I'd be a bit sceptical of that claim, and indeed anything eye-catching Allister Heath says - in my experience he has a habit of not knowing what he's talking about.

[AJE]

Please note that the comments written by Joe and Jim were posted before I wrote the second half of this article (from the photos down).

[jack macdaddy]

...Flat tax, it sounds so fair, transparent, and honest.

Is it? Surely life is complex, and applying a simple tax system belies a simplistic view of life?

How are you able to incentivise and disincentivise human (and corporate) behaviours rapidly without a flexible tax system?

The flat tax assumes (as far as I can see) that all (or most) people are make consistently good decisions.

Surely it's known that whilst (for example) citizens may sign up all manner of idealistic and ethical policies, but who can resist a bargain?

...you'll sign up for organic free-trade ethical widgets, but when push comes to shove, you'll rationalise your decision - "I'll do it next time"... "As long as x thousand (or million?) others are buying them, one deviation from my principles won't hurt"...

Surely this is especially true bearing in mind that we live in a sort of pyramid of wealth, where most purchases are small ones done at the base (and most taxes and penalties are extracted for the benefit of those higher up); it's those purchases at the bottom, less educated, more financially stressed complex sections of society that must be managed by complex tax IF comprehensive change in what the whole society buys.

When I first heard about flat tax, I thought 'what a great idea', on closer inspection it appears to be too good to be true; I suspect that's probably why they dropped it.

(That and the usual insidious corruption that goes on in the sordid world of politicians and executives)

[jack macdaddy]

...IF comprehensive change in what the whole society buys. [is what is wanted].

(sorry I'm dyslexic)

[AJE]

The flat tax assumes (as far as I can see) that all (or most) people are make consistently good decisions.

Why's that?

[Rinky Stingpiece]

Because... the flat tax assumes that people won't give up (or regularly temporarily excuse themselves of) their principles.

The drive not to pass up a bargain is often greater than the desire to stick rigidly to a moral stance on something... many people habitually excuse themselves by saying "oh just this once won't hurt".

The purpose of complex tax is to avoid the vicissitudes of a completely laissez-faire system that would lead to the "rapa nui effect" - Rapa Nui was an island where the people starved to death ultimately because they exhausted all their most important resources: namely, trees.

Complex tax helps manage the behaviour of the nation as a whole for the benefit of all, because within a nation you will always have a significant number of thick people; uneducated people; selfish people etc... (these states overlap of course).

Flat tax depends upon everybody being equally intelligent, educated, considerate, and able to see the broad view (including the future effects of their actions).

Flat tax is an idealist, utopian concept, that can't work in practice.

[Cheap Jordan 1]

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