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Economic Myths: A 'flat tax' is a 'rich giveaway'

Friday, March 10, 2017 9:18
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Something which the current furore over the increase in NICs paid by the self-employed from 9% to 10% of earnings in the basic rate band has miserably failed to provoke, is any sort of debate about NICs suffered by employees, which are 23% of earnings in the basic rate band.

(I accept that the self-employed are at a disadvantage when it comes to claiming certain minor benefits, although under the new rules, they are accruing very similar state pension rights to employees and they can claim Working and Child Tax Credits. That side of the equation can be fixed by moving towards a Citizen’s Basic Income).

The first point, which gradually seems to be dawning on people, is that NICs are just a tax on income. (I’m not holding my breath until they realise that about VAT though).

As to flat tax, for a good overview of the tedious and unfounded arguments for and against, see here. the myth underpinning this, and the false assumption made by both sides is that flat tax = very low rate or = lower overall revenues. No it doesn’t.

The next point is that the combined effects of income tax and NIC vs endless exemptions for investment income means that basic rate taxpayers pay the same or a higher overall rate of tax on their employment income, than higher rate taxpayers pay on investment income. This must surely be wrong, whichever side of the argument you’re on. The Indian Bicycle Marketeers sell this as “ensuring proper funding for the NHS” while simultaneously “encouraging people to build up capital”, it requires DoubleThink or absolute cynicism to support both those things, but most people seem to manage.

To my mind, ‘flat tax’ is three separate concepts:

1. All income from whatever source is taxed at the same rate, be it wages, self-employment income, dividends or interest (rental income should be taxed at penal rates via LVT, of course) or company profits (dividends would come with a tax credit for corporation tax paid at source). Abolish all the fiddly allowances and exemptions for investment income and merge them into a higher personal allowance. This reduces distortions in the economy, saves admin costs etc. This still leaves room for basic and higher rates of tax, of course, but is half way there.

2. That there are no basic higher rates, just one single rate. .This reduces distortions in the economy even more, saves even more admin costs etc.

Because of the maths, low- to middle earners benefit far more from an increase in the personal allowance than from a reduction in the basic rate of tax. So if there is a fiscally neutral shift – a higher personal allowance combined with higher tax rates – low- and middle earners pay less tax and higher earners pay more tax. Conversely, if the personal allowance were scrapped and tax reduced to collect the same revenue, low earners would pay more tax and higher earners would pay less tax.

So a flat tax could be more or less redistributive than the current system – that all depends on the personal allowance and the actual rate.

3. Because of the economic damage and collection costs caused by taxing output and earnings, a lower rate is better than a higher rate. (Yippee! shout the Faux Libs). If you want to collect tax in way that does not drag the economy down while at the same time reducing net income inequality, you should be taxing land values instead, an idea universally loathed by left and right, Faux Libs and Homeys.



Source: http://markwadsworth.blogspot.com/2017/03/economic-myths-flat-tax-is-rich-giveaway.html

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