Progressive Taxation vs Flat Taxation

[schocker]

I agree with everything you stated above.

[Jensen]

I am no expert on Thatcher, UK policy or the 70’s. However, I have paid my share of tax over the years. I’d like to submit some rebuttals to the 4 issues presented in the OP.

1) Under a flat tax rate, you still don’t see the full benefit of extra income. For every £10 extra you earn per year, you only see maybe £8 under a 20% flat tax system. So if only seeing a fraction of the benefit is a disincentive to work, then it’s not an argument as to why you would choose a flat tax system over progressive tax.
People are only disincentivised to work if the reduced amount of benefit is outweighed by the extra costs incurred in securing the higher pay (travel costs, childcare costs, emotional costs). But this is a product of their individual situation, not the tax system. Even under a flat tax system, if I have an opportunity to earn £10k extra salary which is £6k after tax, I still need to weigh that £6k against what it costs me. So again, if you’re disincentivised, it’s not a result of a progressive tax system.
Generally speaking, I would not agree that this is clearly bad on a personal level. If I earn more salary, I keep more money after tax and I am still motivated to maximise my added value.

2) Begin with a scenario where flat tax is levied at say 30% of income. At this point, governments who currently use a progressive tax system would say something along the lines of “people earning below £XXX can’t really afford that level of tax so we’re going to introduce tax breaks for them”. Or they may offer healthcare rebates, cheaper childcare, or some sort of financial relief for low income earners. Well if you’re going to do that, you may as well implement a progressive tax system to begin with to get closer to the amount of tax you wanted to extract from them in the first place. To me, this looks like helping out those in need rather than punishing the people on higher incomes.

Further to this, if someone on low income has £10 extra, they are likely to spend it on food, rent, commodities, widgets or something they need. This injects money back into the economy and helps the profits of the companies they buy things from. Those companies are generally owned by people on higher incomes. Meanwhile, if the FTSE 100 CEO on 2.4m gets a pay rise to 2.7m, what do they do with the extra £300,000? Most of it just sits in their bank account to earn more interest. So maybe the “syntax” is just enforced reinjection of money into the economy.

3) In Australia, there is a difference between Tax Avoidance and Tax Evasion. Tax evasion is illegal and motivated by greed rather than by higher tax rates. It involves some level of deception when numbers are not correctly reported to the tax office in order to reduce the amount of tax liability. This can happen regardless of whether a flat tax or progressive tax system is used. People who are motivated to lie under a progressive tax system to reduce tax paid are also motivated to do so under a flat tax system.

Tax Avoidance on the other hand, is completely legal and in fact encouraged. As a tax advisor, you would be failing in your duties if you did not seek to maximise the amount of tax your client avoids. Tax avoidance general does NOT harm the economy. The reason you are allowed to do it is because the government has specifically allowed you to make certain monetary choices which benefits the economy or the country in some way. If you do so, then they are happy for you to pay less tax. For example, if you are to invest in small businesses, entrepreneurship, R&D projects or your own superannuation, this reduces the burden of the government to invest (taxpayer funds) in these endeavours. Furthermore, the £100 you choose to invest outweighs the £45 of tax which the government could invest from the same £100 of deductable income. So yes, less tax revenue is received if people avoid tax, but it generally means they’ve put the money to good use (where the government would have put it anyway) in a more efficient manner.

4) This is why in Australian some services / tax rules are means tested based on the household income, not the individual’s. It gets around an unintentional side affect of a progressive tax system.

[Latanst1]

Many of your points seem to be arguing the merits of a REGRESSIVE taxation system, rather than a PROGRESSIVE or FLAT RATE taxation system.

All three are of course closely related and have their own merits/demerits although allowing any authority to simply assume what individuals will do with their after-tax earnings is, to my mind, part of the overall problem and contrary to the concept of a free market system (another topic perhaps worthy of separate debate as is whether there is any merit in corporate taxation in a system supported by free individuals--who may then be taxed at multiple levels).

Interesting read.

I am no expert on Thatcher, UK policy or the 70’s. However, I have paid my share of tax over the years. I’d like to submit some rebuttals to the 4 issues presented in the OP.

1) Under a flat tax rate, you still don’t see the full benefit of extra income. For every £10 extra you earn per year, you only see maybe £8 under a 20% flat tax system. So if only seeing a fraction of the benefit is a disincentive to work, then it’s not an argument as to why you would choose a flat tax system over progressive tax.
People are only disincentivised to work if the reduced amount of benefit is outweighed by the extra costs incurred in securing the higher pay (travel costs, childcare costs, emotional costs). But this is a product of their individual situation, not the tax system. Even under a flat tax system, if I have an opportunity to earn £10k extra salary which is £6k after tax, I still need to weigh that £6k against what it costs me. So again, if you’re disincentivised, it’s not a result of a progressive tax system.
Generally speaking, I would not agree that this is clearly bad on a personal level. If I earn more salary, I keep more money after tax and I am still motivated to maximise my added value.

2) Begin with a scenario where flat tax is levied at say 30% of income. At this point, governments who currently use a progressive tax system would say something along the lines of “people earning below £XXX can’t really afford that level of tax so we’re going to introduce tax breaks for them”. Or they may offer healthcare rebates, cheaper childcare, or some sort of financial relief for low income earners. Well if you’re going to do that, you may as well implement a progressive tax system to begin with to get closer to the amount of tax you wanted to extract from them in the first place. To me, this looks like helping out those in need rather than punishing the people on higher incomes.

Further to this, if someone on low income has £10 extra, they are likely to spend it on food, rent, commodities, widgets or something they need. This injects money back into the economy and helps the profits of the companies they buy things from. Those companies are generally owned by people on higher incomes. Meanwhile, if the FTSE 100 CEO on 2.4m gets a pay rise to 2.7m, what do they do with the extra £300,000? Most of it just sits in their bank account to earn more interest. So maybe the “syntax” is just enforced reinjection of money into the economy.

3) In Australia, there is a difference between Tax Avoidance and Tax Evasion. Tax evasion is illegal and motivated by greed rather than by higher tax rates. It involves some level of deception when numbers are not correctly reported to the tax office in order to reduce the amount of tax liability. This can happen regardless of whether a flat tax or progressive tax system is used. People who are motivated to lie under a progressive tax system to reduce tax paid are also motivated to do so under a flat tax system.

Tax Avoidance on the other hand, is completely legal and in fact encouraged. As a tax advisor, you would be failing in your duties if you did not seek to maximise the amount of tax your client avoids. Tax avoidance general does NOT harm the economy. The reason you are allowed to do it is because the government has specifically allowed you to make certain monetary choices which benefits the economy or the country in some way. If you do so, then they are happy for you to pay less tax. For example, if you are to invest in small businesses, entrepreneurship, R&D projects or your own superannuation, this reduces the burden of the government to invest (taxpayer funds) in these endeavours. Furthermore, the £100 you choose to invest outweighs the £45 of tax which the government could invest from the same £100 of deductable income. So yes, less tax revenue is received if people avoid tax, but it generally means they’ve put the money to good use (where the government would have put it anyway) in a more efficient manner.

4) This is why in Australian some services / tax rules are means tested based on the household income, not the individual’s. It gets around an unintentional side affect of a progressive tax system.

[schocker]

Jensen....


If money is placed into a bank account it is then reinvested by the bank. It isn't just sitting there.

No matter what the percentage is with a flat tax the politician has had his power significantly reduced as he/she/it can no longer pick winners or losers; punish or reward.

Off-topic a little, it also brings revenue in from the black market as its income will be taxed when consumed.

A flat tax would eliminate most tax compliance laws. It would give me back the month of Feb as it takes me about a month to compile all of the stacks of docs and receipts.
It probably would suppress consumer impulse purchases.