Socialists for a Flat Tax!

This post has three purposes: to further convince Paul Sagar that I am not like any of the other socialists he knows; to further practice mucking about with spreadsheets; and to challenge the preconceptions of those on the right and left.

Everyone knows that Flat Taxes are nasty regressive things associated with the Adam Smith Institute and the reactionary-capitalist-pig-dog-enemy-of-the-people Tim Worstall and  the ex-communist world. What most people don’t know is that in lots of ways a flat income tax is much more progressive than the income tax which we currently charge people, as I’ll show below.

We currently raise about £150bn in taxation through income tax. There are three tax bands, all your income is yours up to the princely sum of £6,475, the next £37,400 you earn is taxed at 20%, between £37,401-£150,000 you pay 40% tax and half of everything you earn over £150,000 is taken by the state. I set up a flat income tax which also raised £150bn and it looks very different to the tax system we currently have.

The Joseph Rowntree Foundation report that a “single person now needs to earn at least £14,400 a year to reach… a minimum standard of living, according to members of the public.” After tax this £14,400 becomes £11,000 pounds, so this is where I set my tax free allowance. Everyone can now earn enough tax free to have the minimum standard of living the public think everyone deserves. To raise the remaining £150bn from all those earning more than that you have to set the tax rate at 34%.

Mr first reaction is that 34% is a high tax rate to be charging someone earning £15,000, they aren’t rich. Yet, under a flat tax as described above they would be considerably better off. Below are graphs showing each tax system and what percentage of your income you pay as tax. The red line is our current tax system, the blue line my flat tax as described above.

Everyone earning £20,000 or less (about 45% of working people) is better off under a flat tax than under our current tax regime. Unfortunately, there are some losers, below you can see what would happen to “middle England” (about 50% of people). Some lose 5% more than of their income than under our current system.

If the poor are the big winner and the middle the big losers, what happens to the rich you ask? Well, they win pretty big too. Once you earn more than £70,000 you can be comfortably described as rich and the portion of your income taken as tax never exceeds 34% of income.

Above is a flat tax which is more progressive, in that it does not tax the poor but taxes the wealthy, than the regressive income tax system currently in place in the UK.

Progressive taxation may be favoured by some because it allows the rich to be penalised, but I like progressive taxation because it allows us to provide services to people who would not otherwise pay for them, without making them pay for them. If someone earning £10,000 a years gets a library in their area this is a good thing, if they have lost about 8% of their income to help pay for it, this is not such a good thing.

When you collect £150bn from income tax it is difficult to make it progressive. If you favour a progressive tax system then we may need to collect less money through income tax and more by other methods by mathematical necessity. Although I disliked the rest of his campaign, Andy Burnham was onto something when he suggested a Land Value Tax, an annual tax on the market rental value of land.

That the poor pay less than the rich for public services is an important ideal and we are not currently living up to it. There are lots of ways to improve and the fact that one of these is a flat tax should underline exactly how poorly we treat the poor. One of the options is to give the poor money, as Norm says, but the other is to take less from them in the first place.

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7 thoughts on “Socialists for a Flat Tax!

  1. What you have demonstrated is that by raising the tax free allowance, people on low incomes pay less tax.

    This is nothing to do with the flat tax. If you had 0 per cent up to 11k, 25 per cent up to 50k and then 50 per cent on evereything above that, you would have a more progressive tax system which raised the same revenue compared to either the current system or your flat tax, no?

    1. Absolutely, and I would heartily support that system (although, I’m not positive that the rates you give would actually raise the current £150bn).

      However, that isn’t how we currently tax people, our current tax system is more regressive than a flat tax, I think that says something about how poorly tax has been designed.

      …Then there are the huge tax rates people face as benefits are withdrawn too.

  2. …Then there are the huge tax rates people face as benefits are withdrawn too.

    Of course you can deal with that too if you do away with the tax free allowance altogether and in its place provide all UK residents, young or old, rich or poor, with a non-means-tested Universal Benefit of £3640 per annum (or whatever; you can play around with this figure) in place of the form-filling nightmare that is our current social security system. That way taxpayers get the equivalent of a tax free allowance and non-taxpayers (or low taxpayers) get cash. And there would be no problems with anomalously high marginal tax rates for low earners. Works even better if combined with a land value tax instead of income tax.

  3. What Don said.

    Let’s just have a larger tax-free allowance for the worse-off, and then higher bands for the richer…avoiding the situation (as under a flat tax) where the super-rich end up paying virtually the same rate of tax as middle-earners, despite their vastly inflated abilities to contribute more.

  4. Thanks guys,

    I would certainly prefer an actual progressive tax, as I said in reply to Don.

    I’ve taken on board your comments, rewritten it a bit, and I’ve got it up at LibCon on Saturday.

    I don’t want to advocate a flat tax, I merely wanted to point out that it’d be more progressive than our current taxes.

    I was kinda tongue in cheek arguing that, much as those who support PR should support AV because it is closer to PR than FPTP, supporters of progressive taxation could realistically support a flat tax as above because although not progressive, it is still more progressive than our current tax system; not because I think the left should fight for such a tax, but merely to illustrate how bad our current taxes are.

    (Lots of clauses and sub-clauses above there, hope that sentence is understandable).

    “where the super-rich end up paying virtually the same rate of tax as middle-earners, despite their vastly inflated abilities to contribute more.”

    The super-rich, mostly finance types, don’t pay much income tax because they can afford accounts to makes sure they don’t. The merely quite-rich to very-rich will be better off certainly, but the super-rich would hardly notice this change and it is the super rich who have largely driven the increase in inequality in the last 20/30 years.

    Those who make fortunes though finance won’t be taxed easily, the only option to make them less wealthy is to target finance (which is bloated, subsidised and has captured the politicians of many developed countries) and make finance smaller, so the returns to top financiers are smaller.

  5. Well done. I knew you’d get there in the end.

    You do miss out another bonus of a flat tax (or, rather, a simplified tax): it costs far, far less to administer and collect, so more of the tax money that you collect can go to providing services rather than feathering the nests of a bunch of Sir Humphreys.

    “… it is the super rich who have largely driven the increase in inequality in the last 20/30 years.”

    Yes, but largely because they have become super rich, not because everyone else has become super poor.

    DK

    1. “You do miss out another bonus of a flat tax (or, rather, a simplified tax): it costs far, far less to administer and collect, so more of the tax money that you collect can go to providing services rather than feathering the nests of a bunch of Sir Humphreys.”

      Well, this is one of the canards I was going to address at a later date.

      It is simply untrue that a progressive income tax is significantly more difficult to administer than a flat tax.

      GCSE maths, 30 minutes, a pencil and some paper is all you need to work out the tax payable even under many different tax bands.

      It isn’t progresstivity that makes taxes difficult expensive to administer, it is the myriad exemptions and subsidies which form part of the tax system that do that.

      If we just switched to the above rates, without tackling those then administration costs wouldn’t differ significantly. In many ways Flat Tax is a misnomer, Comprehensive Tax would be more accurate. Your rate is what your rate is.

      “Yes, but largely because they have become super rich, not because everyone else has become super poor.”

      Ah, I have a Krugman quote you would like DK (no really, keep reading!):

      Krugman points out that inequality in the U.S. increased dramatically in the 1980s. From 1979 to 1987, he reports, real income before taxes of families in the population’s top tenth rose 21%, while that of the bottom tenth fell 12%. But Krugman does not conclude that the rich got richer by exploiting the poor. Good line: ”For one thing, most of our very poor don’t work, which makes it hard to exploit them.”

      Of course that is true. One thing even my incredibly leftist lecturer on political economy pointed out to me is that I am not well off (in a global sense) because I am unexploited, I am well off because I am exploited so ruthlessly. The third world needs to be exploited more, in other words, in a rather funny yet macabre turn of events for leftists.

      However, the idea that Finance has become successful because of some free market is laughable, I wouldn’t expect you to be so quick to defend wards of the state like that.

      Interesting stuff on Finance and inequality here: http://www.marginalrevolution.com/marginalrevolution/2010/09/new-data-on-income-inequality.html Can’t verify the quality of the research, but it confirms my pre-existing biases…

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