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.