Progressive Taxation vs Flat Taxation

[Oxmeister]

After a bit of a shocking budget in our country where the middle class got truly clobbered it got me thinking about progressive income tax, and thought it would make a good topic for debate.

In the UK progressive income tax has existed as long as I've been alive, and it now is accepted without question. It works as follows - beneath a certain level (currently ~£12.5k p/a) no tax at is all is taken, and then between this level and ~£50k p/a ( an above average, but by no means affluent income) tax is levied at 20%, above this level up to 125k (a good income in the UK) tax is then levied at 40%, and finally above this level it is 45%. On top of all of these is National insurance which is an additional ~12% tax on income*.

The government's latest trick to help fill the fiscal black hole caused by the Ukraine war, is to freeze the levels at which these taxes kick in so that inflation pushes more people into taxation, middle earners into the 40% band, and moderately high earners into the 45% band.

There is worse too - between £50k and £60k child benefit, a previously universal benefit is withdrawn meaning the marginal tax rate between these bands is very high indeed, and people whose income might fall into this region do things like working reduced hours or put money into a pension to reduce their income.

My contention is that progressive taxation is a bad policy, and that a flat tax would be both a fairer and more pragmatic option.

My issues with progressive taxation are as follows :

1) It is a disincentive to work. People who could earn a little more money, but at the risk of stepping into a higher tax bracket , by working more hours or taking a better job will be less motivated to do this because they will see only a fraction of the benefit. This is clearly bad both on a personal level, but even more so for the economy. We should want our best people to be maximising their added value.
2) It's unfair. Most people can reasonably agree that those with the broadest shoulders pay the most, but this already occurs with a flat tax - the more you earn, the more you pay. When you go beyond this and ask people on higher incomes to pay a higher share of their income too, it instead looks like punishment, a sort of 'sin' tax on something we should consider laudable.
3) Linked to the previous point, the perceived unfairness and economic reality of high tax rates encourages people on higher incomes to seek ways to avoid tax in a variety of ways, most of which harm the economy, and some meaning less revenue is received than if a lower flax tax was instead in place.
4) It penalises traditional family structures, where one parent works in a demanding but high paying job , while the spouse puts their career on hold to look after children and consequently earns much less. Instead the system encourages both parents are encouraged to work, putting kids in childcare, with all the disadvantages this approach entails.

There are a few benefits of a progressive tax system, one being that it better recognises that unavoidable basic costs (like food, energy etc) also scale inversely with income, and thus in theory being better able to tax truly 'disposible' income. Overall though, I think a flat tax system is far superior, even if I don't see the UK going in this direction any time soon.


* this one is capped

[schocker]

Doesn't the UK already have a flat tax in the form of VAT?

[GameKat]

The UK was a far more pleasant and prosperous place to live when the top rate of income tax was 90%. The current cost of living crisis has nothing to do with Ukraine, it is a greed crisis driven by the wealthy.

[schocker]

When was that changed? 90% tax rate...

[GameKat]

When was that changed? 90% tax rate...

On income it was dropped to 75% in 1971. Seem to recall tax on investments remained higher. Then Thatcher began the trend of its obsessive lowering, following standard monetarist/neoliberal orthodoxy of beating the working classes with a stick while offering carrots to those comfortably off.

It's perpetuated by this faulty reasoning that the "best people" have to be paid more to produce their excellent work. The whole idea is, of course, not only misguided but also deeply offensive. Are people the "best people" because they already earn a lot? Is an executive working for one of these gouging energy companies a "better person" than a nurse who has to use a food bank to feed his or her family?

A kid just died in England because of living in an environment rife with black mold. Meanwhile there's a shortage of Moet in the UK due to high demand.

The other puzzling thing I find about the OP is this idea that, as one approaches the next tax bracket, some sort of dreadful ennui ensues whereby the individual is demotivated from crossing that barrier. Please show me someone who actually thinks like this. First, most people have minimal control over their remuneration. I did once change jobs, partially motivated by a higher salary, and had absolutely no idea where federal or state tax bands were when I made that decision. Flat tax is and always has been about maintaining a wealth gap. And given that more wealthy people return a far lower proportion of their wealth to the local and national economy, such taxation structures are typically depressive.

[schocker]

So you obviously reject the Laffer Curve. in 1974 he publicized his theory when the general approach was Keynesian. They advocated more government spending to stimulate demand. The policy was ineffective and Laffer asserted that the problem was not because of too little demand but due to the burden of heavy taxes and regulations that left producers without incentive to produce more. This is probably true as the rate inches upward.

I visited England in the early 70s and again in the last several years. I would say it is better today than then. But, you have a different opinion, Why?

[GameKat]

So you obviously reject the Laffer Curve. in 1974 he publicized his theory when the general approach was Keynesian. They advocated more government spending to stimulate demand. The policy was ineffective and Laffer asserted that the problem was not because of too little demand but due to the burden of heavy taxes and regulations that left producers without incentive to produce more. This is probably true as the rate inches upward.

I visited England in the early 70s and again in the last several years. I would say it is better today than then. But, you have a different opinion, Why?

I reject the notion that the goal of a nation should be to increase GDP. That's precisely what's destroying the biosphere.

Re: England, I simply prefer the society produced by the 1945-79 postwar consensus and mixed economy, compared to the 1979 onward Thatcherite/Blairite consensus.

[Justinrs2]

The Laffer curve probably has some truth to it at insanely high levels of taxation, but I've never seen any evidence we've approached that in Britain or the US, even at the relatively high levels of post WW2 taxation.

Progressive taxation remains one of the better ways to encourage wealth redistribution while generating income for the government to use. If anything, we need to make taxation even more progressive, using the dividends to fund more social and economic programs. In the US healthcare drastically needs an overhaul, and in Britain progressive conservative governments have cut funding to the bone in an effort to undermine their healthcare system.

[Oxmeister]

When was that changed? 90% tax rate...

On income it was dropped to 75% in 1971. Seem to recall tax on investments remained higher. Then Thatcher began the trend of its obsessive lowering, following standard monetarist/neoliberal orthodoxy of beating the working classes with a stick while offering carrots to those comfortably off.

It's perpetuated by this faulty reasoning that the "best people" have to be paid more to produce their excellent work. The whole idea is, of course, not only misguided but also deeply offensive. Are people the "best people" because they already earn a lot? Is an executive working for one of these gouging energy companies a "better person" than a nurse who has to use a food bank to feed his or her family?

A kid just died in England because of living in an environment rife with black mold. Meanwhile there's a shortage of Moet in the UK due to high demand.

The other puzzling thing I find about the OP is this idea that, as one approaches the next tax bracket, some sort of dreadful ennui ensues whereby the individual is demotivated from crossing that barrier. Please show me someone who actually thinks like this. First, most people have minimal control over their remuneration. I did once change jobs, partially motivated by a higher salary, and had absolutely no idea where federal or state tax bands were when I made that decision. Flat tax is and always has been about maintaining a wealth gap. And given that more wealthy people return a far lower proportion of their wealth to the local and national economy, such taxation structures are typically depressive.

Thanks for chipping in GameKat - it seems we look at this a little differently, which of course makes for a good debate.

Firstly, I am not old enough to have experienced those days, but I believe it's when we were referred to as the "sick man of Europe" due to our poor economy, so would dispute your earlier statement about being more prosperous. Pleasant, of course , is subjective and somewhat individual, and on that note I don't think I'd have enjoyed living in Britain back then all that much. Each to their own there.

I saw the Thatcher reforms as having had an overwhelmingly positive impact, even if there were some issues in how policies were enacted. I find it difficult to understand how you don't think that it wouldn't require competitive compensation to attract the best people - we see this all the time within businesses, so why wouldn't it apply to the economy as a whole? It's not offensive either if you are not trying to distort the meaning. Without knowing what specific speech you might be referring to, I'm sure references to the best people was strictly confined to workplace performance - I don't think anybody was ever suggesting that those not in that category were unpleasant people, bad spouses, poor parents etc. Certainly there are many things more important in life than money.

But, coming back to the topic, and the behavioral impact of taxation. While I acknowledge that many people don't consider tax rates at all when making decisions (which , if you think about it, is absolutely bonkers - people are investing 40-50 hours every week into something without taking a few minutes from time to time to understand the real return), I assure you that there are some who do think like this - some like me will calculate adjusted marginal earnings of economic decisions with each change of circumstance, while others will learn from experience, perhaps after doing some overtime or having done a good year's trading, that what they eventually saw for it might not have been worth the effort. This is why the office of budget responsibility always build in a behavioral effect to proposed tax increases ( tax avoidance is typically a bigger factor than people changing their actual activity, but both are factors). Sometimes an increase in tax doesn't even raise any more money after the behavioral effect, and yet still causes damage.

People are increasingly getting more control over their remuneration than ever before, making a flat tax even more relevant - with the rise in defined contribution pension schemes, the flexibility of many high paid professions to accommodate reduced hours, and the huge rise in self employment people have more control than ever over what they choose to earn. Tax income fairly, and we can get the best out of everyone regardless of where they fall on the scale.

[Oxmeister]

Doesn't the UK already have a flat tax in the form of VAT?

Well VAT is our equivalent of sales tax and not directly linked to income, though I guess a high tax on consumption does have the effect of making the overall tax system a bit flatter I guess. Even this is sneakily tiered though - basics are either zero rated or reduced rate (5%), and when you realise that those on lower to middle incomes (who are typically either not taxpayers , or basic rate) spend a greater proportion of their income on these zero/reduced goods, and that the opposite is true for those paying higher rates of income tax, it doesn't change the shape of the taxation curve a great deal.

I'm pleased to hear you liked your recent visit to England