Just run that one by me again, would you?
I thought I’d heard this on TV One Breakfast yesterday morning and nearly choked on my Coco Pops, but figured I’d missed some crucial, expounding point of the man’s harebrained argument at the time. Apparently not:
Meanwhile, back in the real world, could someone humour me and explain how flat tax would treat everybody equally?
“…A big argument for the flat tax is that it’s fair — you treat everybody equally.” Daniel Mitchell, The Heritage FoundationIt would seem that under the flat tax system proposed by the Heritage Foundation we’d all start off with the same amount of cash, just as you do on Blogshares. I’d be all in favour of that, but then I’m a Blogshares multimillionaire, as well as a professional fantasist.
Meanwhile, back in the real world, could someone humour me and explain how flat tax would treat everybody equally?
posted by Chris Bell at 11:26 AM
18 Comments:
You should count yourself lucky that they promote a flat percentage tax rather than a flat amount of tax, something Margaret Thatcher tried with the poll tax a few years ago and see where that led her.
I do indeed count myself lucky, Uroskin. I have never been caught in flagrante delicto with a mannequin (http://uroskin.blogspot.com/2005/11/sex-in-news-teen-charged-with-having.html), for instance, and if I were to accidentally attempt sex with a dummy, only in my worst nightmares would it then turn out to have a face like Maggot Scratcher's. So, in spite of your invocation of the Wicked Witch of Finchley and her dreaded poll tax, there are many reasons to be cheerful.
I'm not too sure of a flat tax though I do favour a flattening of rates, coupled with allowing the first $5000 or so dollars of earnings to be tax free.
The arguments being the incentive effects would help people earn more money and this would also generate more revenue.
Back in 'Maggot Scratcher's' era, I recall when the top rate of income tax went down from 83% to 60% and then 40%, the total tax take from these taxpayers actually went up, not only as an absolute sum in cash terms but also as a % of total tax revenue.
Obviously, the argument is that lowering the top tax rate from 39% to say 25% would generate more revenues, especially if various allowances were scrapped.
Think of all the unproductive accountants you could sack!
Anyway, many Eastern European countries are trying flat taxes and some are doing well out of it.
So the fairness is, I pay 20% or so of whatever I earn. And if it helps generate a faster economy, that is even better.
As for making love to tailor's dummies- and I don't mean Winston Peters- i recall a better story from the Sun. A man appeared in court charged with making love to a pavement.
I guess you had to find where it had a small crack first!
I'm sorry, Darren, but I was under the impression that "fair" meant treating people equally, without discrimination. If I earn enough money to own several properties, can afford to regularly travel overseas to spend my wads of cash and employ a creative accountant to do my tax avoidance for me, but still only have to pay tax at the same rate as a person who struggles to subsist and weekly spends every one of their hard-earned dollars — each of which is taxed when they earn it and then again when they spend it — I don't find anything equitable in that. It's sophistry to suggest that generating a "faster economy" will, by definition, treat the stinking poor as equal to the fragrant rich. I was barely subsisting in the yuppie-era Britain you describe. I do remember a lot of Patrick "American Psycho" Bateman-behaviour by people barely old enough to drive a car, but not a lot of equality. And I'd rather hump a pavement than return to a world as brutal and inhuman as that one.
Flat tax doens't mean everyone pays the same amount of tax.
It says we'll take 20% (or whatever) of everyone's income, regardless. So someone with taxable income of $30,000 pays $6000: someone with taxable income of $130,000 pays $26,000.
Two practical matters: the more steps you have in a tax system the greater the incentive for people to employ lawyers and accountants to dodge the tax.
For example, since Labour brought in the 39% rate the amount of taxable income from trusts has trebled. that's a lot of time and money tied up in setting up those entities and keeping them going, and none of it is adding to our productive capacity.
Secondly: when the last two significant cuts were made (in 1988 and on a smaller scale in 1996 and 1998) there was no major drop in govt. revenue. In 1988 the tax take went UP - and this was in the middle of a considerable economic downturn. the reason for that was, for individuals, there was much less margin in finding ways around taxes anymore.
The impact of the mid-1990s cuts was less dramatic (and again they included a period of economic slowdown) but there was no major change in govt revenue.
there's no magical formula about any of this and I'm not a flat tax fundamentalist. My point is that the fewer steps you have in a tax scale the more efficient the system is. And so long as the govt is raising enough revenue I don't see a problem with it.
I didn't suggest that flat tax means everybody pays the same amount of tax, Rob. Whether there's no drop in revenue when cuts are made isn't the point. What matters is where that revenue goes. Would the revenue raised by the government ever trickle down to the people who most need it? It didn't in Thatcher's Yuppie Heaven and I doubt it would here.
I think you're confusing two different issues here: how the money is raised and how it is spent.
You say "Whether there's no drop in revenue when cuts are made isn't the point. Would the revenue raised by the government ever trickle down to the people who most need it?"
If the tax raised is enough to meet existing spending (and it has been every other time taxes have been cut here) it does not affect existing spending programmes. Unless, that is, there are other changes to those programmes, but that has nothing to do with the how the tax is raised. They're two separate policy issues.
We're supposedly talking about treating everybody equally. So, if the money that's raised by the government is raised fairly then it also has to be spent fairly. What are you raising it for, unless you're going to spend it? My original question still stands unanswered:
How does flat tax treat everybody equally?
The tax does treat everyone fairly by taking the same proportion of income from everyone. As I explained, those on higher incomes pay more tax.
I think your problem arises in your original post where you commented "it wouold seem under the tax system proposed by the Heritage Foundation we'd all start off with the same amount of cash."
I don't see how you got that idea. A fair tax system is not the same as making life fair.
My comment about all starting off with the same amount of cash was, of course, sarcasm - as I'm sure you're well aware, Rob. It would, however, be the only way a flat tax system could be fair. Yes, those on higher incomes pay more tax. And so they should. I should also pay a higher proportion of my income to the Revenue than someone who is barely able to subsist, since I stand to benefit proportionately more from the system. Give and take. Apparently unlike you, I don't consider treating people fairly anachronistic. Trying to claim that flat tax treats everybody equally is the kind of opportunistic cynicism that makes people who couldn't care less about equality rich in the first place.
Chris,
That's a load of rhetoric and argumentum ad hominem. I haven't questioned your motives or engaged in name calling. So how about knocking it off and giving a few facts to support your argument?
A couple more facts: someone "barely subsisting" doesn't pay tax. They are eligible for a raft of welfare supports. And so, within reason, they should be.
I have a question, in the interests of clarity: what would be your criteria of a fair tax system?
Rob Hosking explained things better than I.
And here's what Insolent Prick has to say on the issue today.
Wednesday, November 23, 2005
Taxing To The Hilt: The Failed Socialist Experiment
The great mistake that Socialists make about the world is that individuals behaviour does not change by altering the tax system. This is their justification for not cutting taxes when tax cuts are affordable: that they refuse to acknowledge the overwhelming evidence that tax changes influence individual economic activities, which have a massive cumulative effect on the overall economy.
The most startling case in point is the current state of the property market. The principal reason that that the Auckland residential property market has been running so hot over the last few years has nothing to do with sound macroeconomics; even the most basic economist will tell you that housing is not a productive investment. It does not, of itself, create wealth. But it is a sensible individual choice, based in large part to the peculiarities of the tax system that Michael Cullen governs.
The reality is that while it is nonsensical that investment property attracts so much individual investment, compared to productive assets, it is very sensible at the individual level. The reason it makes sense is that for small, individual investors, capital gains on investment properties are not taxed.
Personal income is taxed. At sixty thousand dollars, an investor is paying twice the marginal tax than somebody earning thirty-eight thousand dollars a year. The Socialist mantra claims, for some reason, that this is a fair arrangement. The individual taxpayer, who is by no means wealthy, but is striving hard to earn sixty thousand a year, does not feel that same degree of fairness. Unfairness soon leads to resentment. And resentment leads to people looking at ways of behaving differently.
There are various, widely-known mechanisms and financial products in the market to deliver tax-free capital gains to off-set personal income tax. And there are many individual investors—principally those who are earning over $60,000 per year—who are taking advantage of their legal entitlements.
Gone are the days when investment in residential property was a time-consuming affair, associated with the pitfalls of finding a good tenant to a property. There are several companies in the market that provide an end-to-end property investment service, from development of the property, financing, provision of legal advice, valuation of the property, tenancy and maintenance management, and guarantees of rental returns. An ordinary investor can enter the residential property market, having expended no greater energy than he would if he had simply gone down to the bank and made a deposit.
These are not the rich fat cats of society. This is not a scandal of winebox proportions. This is not a story of a handful of high net-worth individuals exploiting cunningly-devised, and little-known tax legislation, to rip the tax base of a few million dollars here and there. Rather, it is a matter of ordinary, mum-and-dad investors making the use of basic investment vehicles to reduce their tax liabilities, to the tune of hundreds of millions, if not billions, of dollars a year. They are not even small business owners who can take advantage of this situation, but ordinary, average, middle-income salary and wage earners.
The average income for a university-educated, full-time worker in paid employment is morme than $60,000 per year. In Auckland, that person earns more. Consequently, there is a massive market for property-based financial products that are designed to reduce tax.
The property market in New Zealand is effectively a state-sanctioned, and profitable grand pyramid scheme. Demand for residential property investment, propelled by high marginal tax rates, is largely immune to incremental interest rate rises, as the higher the finance cost of a property, the greater that property losses can be attributed against personal income tax. High marginal tax rates at low threshholds, through the property market, have created a degree of structural inflation.
Michael Cullen argues that reducing tax across the board has inflationary effects. Roger Kerr has written extensively on this, pointing out that in an open, competitive, trading economy, the effect of increasing the money supply is less inflationary than in a protected market. The reason for this is that the price of most goods and services in New Zealand is directly related to international commodity prices: New Zealand is too small a market to effect an increase in international commodity prices.
And what Cullen's argument doesn't address is that high marginal tax rates are a key component in both structural inflation, and high interest rates: housing investment is normally financed by fixed-term interest rates that are immune to increases in the Reserve Bank's OCR. House price inflation, driven by increased demand for investment property, to off-set personal income tax, is the key player in the structural inflationary mix.
This, of course, constitutes on its own, a massive potential threat to the tax base. It is guided, for no other reason, than that individual investors feel resentful towards the Government for the amount of money they are paying in tax, for little service.
The result is four-fold: that the Socialists’ attempt to punish the well-off doesn’t actually work, that the tax base is reduced, and that economic activity is distorted: that individuals will cumulatively invest in non-productive assets, rather than productive businesses. Further, low-income New Zealanders are priced out of owning their own homes, as structural inflation locks them out.
That is entirely the situation in the New Zealand economy today.
The Reserve Bank has responded that it is looking at the arrangements of Loss Attributing Qualifying Companies. Again, these are not intricate devices reserved only for the very wealthy who can afford complex legal advice; they can be set up by any one of many mortgage-brokers in New Zealand. They are the prime instrument for reducing an individual’s tax liability. These products are easily accessible, and inexpensive to set up.
Tens of thousands of LAQCs function to fuel and maintain the value of the property market. The effect of any changes to the tax system relating to LAQCs would have an immediate and catastrophic effect on the Auckland housing market, in particular. The consequence of that is a potential threat to the banking system as a whole. But before the Socialists suggest that such a correction would be a good thing, consider this: the working capital of most small businesses in New Zealand is financed by equity in residential property. Start pinging the housing market, and small companies--and therefore jobs--go down the drain.
The only means to safely amend this situation is not to look at a capital gains tax on property. Capital gains have come about because of the distortionary nature of the tax system, which is driving investors into property ahead of other asset classes.
A far more practical approach to encourage investors to move into productive assets is to reduce high marginal tax rates. It’s not something Michael Cullen would like to tell his voters—who believe that middle-income New Zealanders are actually being punished for working hard and earning more. The reality for many of them is that the punishment doesn’t exist. Instead, the tax system fuels higher housing prices, making it unaffordable for low-income New Zealanders to live in places like Auckland and Wellington. Yet again, the Socialist formula cheats low-income New Zealanders who aren’t paying sufficient tax to benefit from tax write-offs in order to leverage them into the property market.
By reducing marginal tax rates and increasing the threshholds to which those rates apply, the Government would remove this perverse incentive to over-invest in the property market. Residential property would still be a viable investment option, but it would no longer be the only investment option for many New Zealanders. House prices would rise at a slower rate, and the structural inflation, and higher interest rates to attempt to counter those price rises, would disappear.
This morning I was having breakfast with a mate, who earns around a hundred grand a year. He’s not wealthy, except in the eyes of the non-working poor, but he is comfortable. I asked him about his property investments. He responded that he had none. I said to him: “Are you fucking mad? Why not?”
He answers: “Because I’m not sure about where the market’s at, right now.”
So I give him a three-minute spiel around the fact the Auckland property market has doubled in value, every seven years, for the last hundred years. That a very simply-devised mechanism would provide him with an additional income stream of twenty thousand dollars a year, plus capital gains over the medium-term.
By the time we got to our second coffee, I had made a call to another mate to see him at lunchtime. By dinner this evening, my breakfast companion was the proud investor in two residential properties, and Dr Cullen was some twenty thousand dollars a year poorer.
New Zealanders don’t have to go off-shore to pay lower taxes. They can do that right here. Of course, it doesn’t make our economy as a whole more robust, and low-income New Zealanders don’t share in that wealth—but that is the necessary consequence of Socialism and rampant taxation.
The Labour Government has slowly, but surely, created this situation due to their dogmatic insistence that it is right and fair to punish middle-income New Zealanders. Over the last six years wage rises have pushed middle New Zealand into high marginal tax brackets. This has encouraged New Zealanders to seek alternative investment options to reduce that tax liability.
Rob,
There are many people in this country who barely subsist (i.e. maintain or support themselves at a minimal level) who pay tax and who don't claim welfare benefits. Even people on welfare pay tax on everything they legally buy, and they can't claim that back. It seems I was unclear: my ire is directed at people like Daniel Mitchell, who camouflage greed with cynical, self-serving rhetoric about equality. What would my criteria be for a fair tax system? I've lived under varying tax regimes in three different countries and I don't have many issues with the system presently in operation in New Zealand (although I've never considered it particularly fair in any of those countries that people should have their incomes taxed and then be forced to pay GST/MwSt/VAT on everything they buy, as well... but that's another argument). As I said, in my opinion, the more you earn, the higher the proportion of your earnings that should be taxable. I don't object to people becoming rich, per se, just to this hubris that the wealthy are doing the economy an incredible favour and therefore they deserve to be compensated somehow. If people desire to be obscenely rich, fine. But by my understanding of fairness, they should then be required to pay some form of "greed tax" for that privilege. I'm afraid I interpret many of the comments in Darren's quoted IP post as more of the right's convenient and self-serving sophistry. Those who have the wherewithal "to seek alternative investment options to reduce [their] tax liability", exist on a different plane from those barely subsisting.
Finally, please accept my apologies if you felt any "name calling" was directed at you.
Darren,
IP's post is principally about reducing marginal tax rates, not about flat tax, but nevertheless, he presumes to speak for me and many others when he generalises:
"The individual taxpayer, who is by no means wealthy, but is striving hard to earn sixty thousand a year, does not feel that same degree of fairness. Unfairness soon leads to resentment."
I strive hard to earn sixty-thousand a year and whatever else I can earn beyond that. I don't consider it unfair to be paying more tax than someone who earns $38,000 a year and I don't resent it. What I resent is the suggestion that all Labour voters believe that "middle-income New Zealanders" are being punished for working hard and earning more, and that the right genuinely cares about "leveraging" low-income New Zealanders into the property market.
Chris,
Firstly, apology accepted. No offence taken, now we've got that sorted out.
Secondly: a great deal of your problem with the idea of lower and/or flat taxes seems to boil down to not liking some of the people advocating it, or not liking what you presume to be their motives. Those, at least, are the reasons you give for holding the views you do.
You say you "don't object to people becoming rich, per se, just to this hubris that the wealthy are doing the economy an incredible favour and therefore they deserve to be compensated somehow." You also talk of a "greed tax".
Should a tax system be aimed at countering hubris? What's your actual grizzle here? That some people who argue for a flatter tax scale are arseholes? Of course some are, but arsehole-dom is pretty evenly distributed across the tax scales.
Is it really a good idea to base a viewpoint on the fact that some people advocating it are arseholes? To run the counter-factual for a minute, some of my closest friends hold views well to my Left - genuine socialists, in one or two cases. The fact they hold those views doesn't make me agree with their arguments any more: nor does it mean I like them any less.
Two other "back in the real world" points, one which I've made before - there remains the practical fact that the less complicated a tax system, the less scope there is for avoidance.
We had a much more graduated tax system until the mid 1980s and by then the main industry in Auckland was tax avoidance. Not only was it unproductive, but it was also really rank. The emphasis was on finding ways to fiddle the system. That has an immensly corrosive impact on both individual and public morality.
Introducing the 39% scale, as Labour did, has seen an explosion (and for once "explosion" is not an exaggeration) in tax minimisation activity, as I mentioned earlier. It has reached extraordinary levels. Nothing like 1970s-80s levels, but there's more than a whiff of it there.
Secondly, the global trend of headline personal and (espeically) company tax rates is down. We're in a war for talent. the higher our tax rates the more difficult it is. And no I'm not arguing for a "race to the bottom" because of course people move around for non-tax reasons as well . I'm just saying the lower and less complex the better.
The GST stuff -I've got some sympthy for your argument there. I never understood the enthusiasm some seem to have for the tax at the time it was introduced. But, as you say, that's another issue.
Finally: my own criteria for a tax system: 1) people should be able to keep as much of their own property as possible, regardless of how much they earn, who they are or whether I like them or not, simply because it is THEIRS; 2) tax should not discourage enterprise or encourage emigration;
3) a tax system should be as simple as possible: it makes it easier to collect and spot avoidance activity and also minimises both incentives and opportunities for avoidance activity.
One final over-arching point - I think we're both talking about equality, but you're perhaps talking more about equality of outcomes and I'm talking more about equality of rules.
Well, Rob, philosophically we're certainly diametrically opposed because I can't see the point of having rules unless it's for the purpose of a potential equality of outcomes.
Your argument that in a less complicated tax system there is less scope for avoidance has great merit. But in my experience, the 'specific gravity' of money will always prevail over simplicity, just as those who have it will usually prevail over those who don't. That's why those who have most of it need to be 'handicapped' by the rules you advocate, and which you claim to offer equality.
Is it a good idea to base a viewpoint on the fact that some people advocating it are arseholes? No it isn't. But the basis of my viewpoint is that those who talk about equality in relation to a flat tax system are really only talking about a system that benefits them, and to pretend anything else is utterly disingenuous.
there you go again. You concede the point about less complexity having "great merit" and then worry about the motives of those advocating flatter taxes by saying that "those who talk about equality in relation to a flat tax system are really only talking about a system that benefits them."
Ever hear the Aesop's fable about a city which had to build a wall to defend itself? They had a meeting, the carpenter got up and said, look, there's plenty of wood, we can build it quickly. the stonecutter got up and said, that's no good, wood burns easily. Stone is much more solid, much more suitable. Then the tanner got to his feet and asked whether people had really considered all the attributes of leather.
Most people chuckle about the tanner. But what about the stonecutter? He had a point, and was no more or less venal than than other two.
Stuff the motives of the people arguing for a flatter tax scale. who cares? What matters is what works. And a too steep a tax scale does two things NZ can ill afford - divert too many resources into minimisation activity (see the examples I've given earlier, and you have conceded this point) and sends other packing to more lucrative shores.
I'm sorry, Rob, but nothing you have said demonstrates you really understand the concept of fairness. Each time you try to answer the original, motivating question you dig yourself a deeper hole. You cannot credibly cite "treating everybody equally" as an argument for flat tax and then expect people to take you seriously, any more than you could say that by building the wall out of stone you were going to "protect the poor people". The difference, of course, is that if the stonemason had said that he would at least have been partially right. Daniel Mitchell is entirely, utterly, incontrovertibly wrong, and to expect me not to question his motives for saying it is naïve.
Post a Comment
Links to this post:
Create a Link
<< Home