Relatively right-wing economist Patrick Minford came up with his own suggestions for a flat-tax system a few years ago. As a simplification campaigner, there was a lot I liked about this. What stands out are these bits...
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A UK flat tax on consumption would bring the imputed rent on owner-occupied housing into the tax base and would allow the standard rate of income tax to be cut cautiously to a 15% flat tax rate ...
There will plainly be an immediate loss of revenue from the cut in the top rate from 40% to the standard rate of 22%. According to the standard 2005/6 tax ready reckoner, the cost of this would be £21 billion, about 2% of GDP... However there would be large offsetting gains in revenue from bringing imputed owner-occupied housing into the tax base...
In politics there is a well-respected principle: for any reform to succeed, there should as few losers as possible. The overall cut in taxation proposed here implies an absence of any major class of losers – the vast majority of those who lose from paying tax on owner-occupied housing ... will benefit more from the cuts in tax rates. However inevitably there will be some individuals for whom there is a serious loss; notably anyone (probably retired) who has a valuable house (bought out of taxed income) but with a small current income. To avoid injustice to these people, an indefinite transitional provision is proposed ...
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Many minor technical quibbles aside, how is this any different to what I say? A low flat tax on incomes/production is better than what we've got, that goes without saying.
He suggested extending the flat tax on "the imputed rent of owner-occupied housing" (which mathematically amounts to around 1.5% per annum on the value of owner-occupied housing) in order to a) broaden the base and hence reduce the rate and b) to avoid the accusation that it was a 'rich giveaway'.
I have often suggested replacing all existing property and wealth-related taxes with a flat property value tax or land value tax that mathematically amounts to around 1.5% per annum on the value of owner-occupied housing, with a roll-up option for pensioners, obviously.
Answers on a postcard...
Saturday, 24 January 2009
How come he's allowed to say this? (2)
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5 comments:
From memory before WW2 income tax was levied on the imputed rent paid by owner occupiers who had no mortgage. The idea of taxing this benefit of not paying rent, or a mortgage interest, was mooted not long ago as another Brown way of raising MORE money from tax. His spin was of course to play the envy card.
Now although I see the logic of Minfords proposals I am not at all sure that it would be accepted by the house owning class. Unless they saved a shed load of income tax and other taxes.
Overall I am in favour of just cutting taxes on everything possible and taking the biggest axe you've ever seen to government spending. IMHO 10% - a tithe - income tax/sales tax/corporation tax/property tax is more than enough for the government to waste half of.
L, AFAIAA, we had Schedule A taxation of imputed rents until 1963.
After it was scrapped, house prices trebled in ten years (of course), which the Liberal Party decided could be tackled by replacing Domestic Rate with Site Value Rating in their October 1974 manifesto.
Interestingly, in their February 1974 manifesto they appear to be calling for more Site Value Rating, less income tax and replacing the Welfare State with a Citizen's Income scheme (there's plenty of dross in there as well, but hey).
There is never anything simple about a tax on income.
Mark
Since reading your Bow Group paper I have been converted to the idea of a flat tax with citizens income. I work in tax and although the current system has paid my (modest) wages for the last 25 years, clearly a simple system with an end to all the poverty traps would be a big plus for the country if a big minus for me.
The land value tax; what worries me about this is that lots of assets currently taxed under capital gains tax would become free of tax. Wouldn't wealthy people simply make sure they received income as capital? There are lots of schemes that clever tax barristers could construct/resurrect that would mangae this. But perhaps that doesn't matter, because the businesses that were producing the profits wouldn't be able to offset the capital payments against their flat rate income/corporation tax, so in the end all income would be taxed, either on businesses or on their owners/managers. How have you thought this through?
Other topics I'd be interested in you blogging about; the paper by Rogoff at this years AEA about banking crises and the propensity for globalised financial systems to suffer lots of country specific banking crises. Whereas when there was the Bretton Woods system and lots of controls over capital movements (that a leftie like me approves of) domestic banking crises were much fewer.
Why do you think Richard Murphy at taxjustice is so opposed to the flat tax? I like a lot of what Murphy says, and it seems to me that a simple tax system like the one you are proposing would achieve what he is after - he could simply allow for a higher personal allowance and higher rate of flat tax than you?
Vis a vis Minford. You are opposed to a sales tax/VAT tax on consumption. But as i understand economists they say this is the most efficient form of taxation. Why do you take against it? For instance your land value tax could be replaced by a consumption tax. Wouldn't that achieve the same end?
Just a few ideas I'd be interested in reading about in the next few months.
TG, good questions...
1. As to the CI/flat tax scheme, you can make this 'right wing' with a low or no CI and a low tax rate or 'left wing' with a high CI and a high tax rate. The Bow Group version was the middle of the road version with very few winners or losers. Taxes on incomes are bad enough, but having different rates on different sources just introduces more distortions - a high flat tax is still better than what we've got.
2. As to CGT, yes I have thought it through, you have answered the issue. Or we could have a five year taper period for assets that are neither shares nor land. Yes there will be 'avoidance', the amounts involved are minimal.
3. I've fixed the banking 'crisis', see e.g. here. If they get in a mess again, we'll just fix it again and again until they learn their lesson.
4. Sales taxes on specific things with specific external costs and 'sin taxes' (fuel, tobacco, alcohol, drugs) are perfectly acceptable, or a 1% tax on new goods to cover refuse collection costs. So far, so efficient. A blanket VAT is far more damaging than corporation tax, see here.
5. Don't make the mistake of thinking that 'people who write about economics' are economists, any more than Murray Walker was a racing driver. Most of 'em don't have a clue.
6. The point about LVT is that as land is in fixed supply, LVT does not depress the amount 'supplied', i.e. does not reduce economic activity or drive it abroad (draw yourself a supply-demand chart with a vertical supply line, with and without the tax!). Further, LVT would act like an extra interest rate on the land/bubble element so it would keep property prices low and stable.
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