Douglas Bamford's tax appeal

Written by Douglas Bamford Tuesday, 22 May 2012 20:23
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Doug is the author of the forthcoming Searching Finance book on rethinking tax.


The Taxpayers Alliance and their friends have come up with a report on taxation. I have only read the summary, but it seems that they are trying to sell a set of long-standing proposals: a flat tax and a simplified tax base. These aren't new ideas, but old ideas dressed up. I'm in favour of a change in tax base so that we can work out people's taxes on a more appropriate basis, though the proposal here seems to be far too generous to people who gain from and receive (through gifts and inheritance) large amounts of wealth. The wealthy are clearly going to benefit from this while the worst off will not. 


The report is presented as if it is some kind of independent analysis, though it is perhaps better to see it as a manifesto for political influence groups. Its a coalition of people whose agenda is to make taxation less progressive and to cut public spending accordingly.


As Richard Murphy and Jon Stone point out, the idea of moving to a flat tax is to make the rich richer and the poor poorer.The summary and some of the supporting puff pieces I've read seem to be at pains to make the proposals appear reasonable and fair.


Indeed, there is a graph in the summary document highlighting that the groups who get the biggest percentage cut in their tax compared to the current system are in the lower end of the spectrum, with a slightly smaller percentage gain for each subsequent higher earning group. Such a graph makes it seem like it is pretty fair - the proposal helps the 'squeezed middle.' However, this graph is very misleading. 


The first problem with the graph is that it expresses a percentage cut on current tax payments. A 50% cut for someone who currently pays a few thousand pounds is much less money than the 40% cut for the person earning a million. This graph doesn't tell us what matters, which is how much tax people pay, or how much income they will have after tax.


The second problem is that the graph doesn't tell us all that we need to know in order to compare this world the flat tax utopia. The lowest earning group seems to get a tiny tax cut, which still leaves the claim that they will be better off. Of course, as the most likely recipients of public spending, this group on average may save a few pounds on their tax bill but will lose massively in the reduction in public services. Taking from the poor to make the rich better off is another way of putting this. Perhaps some of the worst off get more than they should, but that doesn't seem like a very fair starting point for a policy to me.


The report authors may have different reasons for their involvement. They may think that progressive taxation somehow interferes with people's freedom (where freedom is defined in a very market-specific manner). They may genuinely believe that the economic growth resulting from fewer taxes would be so amazing that in the medium term even those who lose out from the reduced public spending would be better off, despite a lack of evidence to back this up.


They clearly think the Victorian times were a golden age, given that a lot of their graphs go back to the mid 1800s. Of course, British economic growth was much better in those days, and they perhaps believe that the low taxation and public spending was the reason. Of course, the lack of very much global competition in industry and the existence of a large empire with restricted trade might also have helped.


However, those of us who have read a bit of Dickens or studied some history might have heard something  about the terrible poverty, high mortality rates and restricted opportunities that many faced in those times. Again, the authors of the report might think that economic growth or their particular brand of freedom is so important that these eggs (real people) are worth cracking for the ultimate goal. 


I, on the other hand, support progressive taxation on the basis that the market doesn't work equally well for all. Some people do very well out of the market while others struggle and are left behind. A market-based economy is absolutely essential, and it needs to have incentives for people to be productive. However, it doesn't have any moral value in and of itself. The benefits of the market should be shared from the lucky to the less lucky, and to do that you need to tax the lucky at a higher rate and provide an income top-up (through a negative income tax or my own proposal) or through public services that low earners would not otherwise be able to afford.

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