Flat Tax – A simplified view
Socialist opponents of flat tax will often use the arguments that progressive taxation is a fairer form of redistribution and that flat tax would unfairly compensate the well off.
I thought I would challenge this assertion by looking at some actual figures. The table below lists a selection of salaries from £10,000 to £200,000 along with the actual tax paid for this tax year. The marginal tax rate is simply the percentage of that gross wage that goes straight to El Gordo.
I should point out that these are income tax calculations and do not take into account any means tested tax credits that may be awarded to lower earners. The tax figure includes NI contributions.
The next table illustrates a flat tax system. The rules are simple: the first £18,000 of your salary is tax free. After that the tax rate is 45%. NI would be scrapped. 45% sounds like a lot, but check out the figures and see for yourself:
Obviously, the first thing you notice is that salaries below £50,000 will benefit enormously from this structure. The second thing that jumped out at me was that this system is more progressive than the our current taxation system. Wages from around £85,000+ would attract more tax than they do currently, and the higher you go, the more painful it gets.
I suspect that the above figures would not work in reality as the net tax take to the Treasury would drop dramatically (If somebody could find me a salary distribution scale for the UK I might be able to guesstimate the net effect).
With that in mind, I tweaked the input parameters (all two of them) to see if I could create a little more balance: a £12,000 tax free allowance and a tax rate of 42%.
This time the lower earners are still much better off, the middle income earners are pretty much unaffected and the higher earners still pay more than they do now.
Tax Credits could be scrapped. Thousands of civil servants would no longer be required. Self Assessment tax forms would only have two numbers to fill out. And finally, the lefties would get what they always wanted: a proper progressive tax system that redistributes wealth to the low paid. Automatically. No forms to fill out. No “means tested” shite to put up with. You simply get to keep what you rightfully earned.
Surely that is better than what we have now?
16 Comments
Other Links to this Post
RSS feed for comments on this post. TrackBack URI
By Dr Dan H., July 27, 2006 @ 11:38 am
You’re right, it IS better, and the system would also benefit us since fewer bureaucrats would have to be paid to extract the tax; so the Government would net more tax overall.
What this current government seems never to understand is that bureaucracies are inherently inefficient and poor at meeting peoples’ needs. Tax Credits are a very, very poor solution that have been shown to be almost impossible for the dimwits in the civil service to administer.
If you are in charge of a civil service known to be staffed with lackwits and morons, then you should be aiming for them to do as little as possible, so you can reduce the number of possible things that go wrong. You should also be encoraging personal self-reliance as much as possible.
As I see it, the main problem at the moment is that the notion of “I pay my taxes therefore I deserve X” has gotten so embedded in the public psyche that most people have forgotten how costly X actually is (and a sizable proportion have dropped the “I pay my taxes” bit, too).
The NHS should not be free, or at least no more than basic care. Ditto everything else, but couple this with much lower taxation for those who work, and much lower benefits for non-workers.
By Uponnothing, July 27, 2006 @ 4:26 pm
I agree completely, why is nothing ever simple?
I work in the civil service, and not everyone is a complete idiot, however, this small number of people with brains are soon forced out by the sheer idiocy of those in charge. The civil service rewards sychophancy and staff that are happy to push paper around in pointless circles, anyone who dares point out that the system is rubbish is treated with disdain and ‘marked’ as trouble, in order that they are not promoted.
I have never met a bigger bunch of morons running an organisation.
By Emily, August 1, 2006 @ 7:31 pm
And how about tax-free maternity allowance? That would be nice.
PS Nice new look!
By Mark Wadsworth, August 18, 2006 @ 4:55 pm
This is pretty much what I said in my Bow Group report that was published a few weeks ago, check it out at http://www.bowgroup.org
only I chose £11,000 and 38% and as far as I am concerned it is revenue neutral.
MW
By Matthew, August 22, 2006 @ 2:04 pm
You’re confused about the meaning of ‘marginal tax rate’ – what you show is the average tax rate. The marginal tax rate in your proposals is either 0%/45% or 0%/42%. I note this means that everyone who earns above the tax-free allowance but below today’s higher-rate allowance would have a higher marginal rate than today. We used to be told this is what matters for incentives?
By Politicalog, August 22, 2006 @ 3:41 pm
Matthew,
Good point. I had a feeling I was using the wrong terminology. I am not a taxation expert, hence my “Simplistic” reference in the title. That said I prefer “Actual Tax Rate” to “Average Tax Rate”.
I note this means that everyone who earns above the tax-free allowance but below today’s higher-rate allowance would have a higher marginal rate than today.
They may have a higher marginal rate, but as I see it, the net effect is that they give less money to the government than they do under the current system.
My figures are purely illustrative and are not meant as a serious Flat Tax solution. At the moment I am studying Mark Wadsworth’s Bowman Group report and I will return to this subject in a later post.
Cheers
By Matthew, August 22, 2006 @ 4:34 pm
“They may have a higher marginal rate, but as I see it, the net effect is that they give less money to the government than they do under the current system.”
True, but without having any idea whether it raises revenue/lowers revenue it’s a bit meaningless (as I suppose is the marginal rate).
The Bow Group paper is an interesting paper. I didn’t understand one bit – the huge gain from indexing, insofar as it seems to only apply to the flat tax proposal, not the current system (hence the gain) – and I didn’t like another – the assumption that it would lead to faster growth/huge savings enough to pay for itself (a classic ASI device). But otherwise it was pretty thought-provoking.
By Matthew, August 22, 2006 @ 4:39 pm
I also don’t understand the obsession with the idea that flat taxes are great because they simplify accounting. They reduce the number of calculations by one per tax band. Anyone can do this calculation. His other suggestions would reduce administration and accountancy time, but it would make next to no difference to have (say) a 20% or 50% rate.
By Politicalog, August 22, 2006 @ 4:59 pm
I also don’t understand the obsession with the idea that flat taxes are great because they simplify accounting.
It not the flattening of the tax structures that gives the simplification. It is the scrapping of all the complicated benefits in kind and various allowances that obfuscate the whole system.
As an example take a look at the self assessment tax form. It is like war and peace.
By Mark Wadsworth, August 23, 2006 @ 1:33 pm
Dear Matthew – I did all the workings for my report based on the most up to date figures I could find – in most areas this is 2004-05 or even 2003-04.
My figure of £11,000 personal allowance (for example) is not absolute and cast in stone, you can take a figure anywhere between £10,000 and £12,000 really. Most serious flat tax proponents suggest a personal allowance of that order.
Having worked out that an £11,000 personal allowance would lead to a revenue shortfall based on 2004-05 incomes, it stands to reason if we still used an £11,000 personal allowance in the current year 2006-07, when nominal wages are nearly 10% higher, the effect of “fiscal drag” would mean than tax receipts for this year would be more or less the same under my suggested system as they will be under the actual system.
What looks like a “huge gain” is just 10% or so of current PAYE, income tax and Employees’ NI receipts.
I do not claim that my system is the absolute panacea for everything, but LVT will help a little bit, a dead simple system helps a little bit (reduces economic distortions and saves admin and hassle and avoidance), a uniform tax rate helps a little bit, ending the poverty/unemployment trap helps a little bit, scrapping Employer’s NI helps a little bit and so on. All these little bits must add up to an extra 1% on GDP growth or so, so after ten years, GDP would be 10% higher than it otherwise will be.
By Mark Wadsworth, August 23, 2006 @ 1:45 pm
An even better way of looking at all this is to look at the tax paid by higher earners under the current system in the first table. If you work out the total income tax and NI using the proper bands, rates and tables using pencil and paper, it takes about ten minutes to get it right.
A short cut is to deduct the magic figure of £13,333 from the gross salary and times it by 41%, there’s your total tax/NI bill (try it!!!). I work in tax, this is just one of the tricks of the trade.
Under the current system, a hairdresser on £18,000 pays £4,019. If he or she were allowed to use the same method as higher rate taxpayer, they would pay 41% tax on £4,667, or a total bill of only £1,913, that’s £40 a week better off!
Do you think that our hairdresser cares more about their marginal rate or the £40 a week they are better off?
By Mark Wadsworth, August 23, 2006 @ 1:50 pm
Dear Emily – the logical conclusion of a flat tax system is a “Citizen’s Income”. A non-means tested, not-taxable, non-contributory cash benefit for every adult to replace all other benefits. I built such a benefit into my system, i.e. a woman on maternity leave automatically gets £80 per week tax-free for as long as she likes until she goes back to work. I also suggested doubling Child Benefit for pre-school age children to replace all this Child Tax Credits malarkey on a cost-neutral basis.
By Chris, September 20, 2006 @ 5:15 pm
I did the calculations for a revenue-neutral flat tax earlier this year and concluded that it would have to be set at between 38% and 50%. My preference was 40%, at which level there would bo no significant increase in the personal allowance. If you’re averse to a tax cut for higher rate employee then a rate of 48% would leave them no better off, and allow for a big increase in personal allowance.
My article and calculations can be found at http://chris-king-uk.blogspot.com/2006/05/flat-tax-for-uk_09.html
By Politicalog, September 21, 2006 @ 2:19 pm
Cheers Chris… I’ll read it through. The premise of “no significant increase in the personal allowance” makes it hard to sell as a means of tax relief on the low paid.
Do your calculations take into account the drop in administrative costs?
By Mark Wadsworth, September 21, 2006 @ 3:50 pm
Chris’ approach is similar to mine (www.bowgroup.org) but he ends up with a higher rate (40%) and a lower personal allowance (£5,000). I calculated fiscally neutral is 38% and £11,000. Hmm!
The main differences between our approaches are
- I have maintained the fiction that Employers pay Employers’ NI. Scrapping this and increasing corporation tax to my suggested flat rate of 38% means UK plc is overall no better or worse off BUT labour intensive businesses are a lot better off and propery companies are a bit worse off.
- instead of treating interest as dividends (non deductible, non taxable), I suggested taxing it at half rates and restricting relief for interest to half rates (unless borrowed from bona fide third party).
Under his system, most people seem to be worse off, which makes me think he was a bit pessimistic. Under my suggested system, there are slightly more winners than losers, I have factored in some admin cost savings and may have been a tad optimistic.
Chris – if you have time, please read my Bow Group report and I’ll go through your calculations properly, maybe we can rake over each others’ calculations until we can agree the likely correct figure. My email address is in the report.
By Glenn Aylett, January 13, 2007 @ 2:48 pm
Good idea this flat tax system, as I’ve mentioned this on the Rightlinks forum. Combining NI and income tax will also make the tax rate look honest, as NI is a compulsory tax like income tax. Currently, if you add NI, my marginal tax rate is 33 per cent.
However, the 42 per cent rate still wouldn’t stop the problem of tax exile and evasion by the super rich and the lower end of the current 40 per cent tax bracket would still grumble as their taxes would increase slightly. My proposal, as outlined on Rightlinks, would be to have a 20 per cent flat tax rate with an allowance of £ 7500 for single people and pensioners and an allowance of £ 10,000 for married people. This would benefit lower paid workers, though not as much as the £ 12,000/42 per cent flat tax system outlined on here, but would also reduce the tax burden on people who now find themselves in the supertax bracket such as teachers and police sergeants and would also stop tax exile and evasion by people on Beckham money.