Tuesday, September 13, 2011

Flat Tax

With the talk of corporate tax evasion/avoidance discussions about the introduction of a flat tax seem to inevitably raise their heads. At a glance the system seems logical - everyone pays the same percentage tax of their income regardless of that income. This makes it easier to understand and administer which reduces the costs on the state (and thus the taxpayers). Being simple it's less easy to avoid and if the penalties for such were high enough those who owed money would be more likely to pay it rather than try to avoid it.

Oddly enough I think this could work or at least one variant - Negative Income Tax. A deduction is set to let's say the median wage. This is deducted from earnings and the amount remaining is multiplied by the tax rate. If the amount is positive that's the amount owed to the government. If the amount is negative that's the amount the government owe.

So if the median wage is £24k a year and on the current minimum wage a person earns £12k a year and the tax rate was 20% then (12k-24k)*0.2=£2,400 that the government owe to this person. Earn £36k a year and that person owes £2,400 to the government. How is this a benefit?

Firsty it reduces the need for benefits as a separate system as those in need of extra will be receiving it via the tax system. Secondly it can remove or reduce the minimum wage requirements that some advocates claim is stifling the unskilled market. Thirdly pay rises are instantly calculable - for every £1k a year rise a person wil get £800 regardless of whether they're below or above the threshold.

As an added extra it could also remove the benefit trap in which a person who moves from receiving benefits to earning a wage results in less income. If with zero earnings the income is £4,800 a year then any earnings above zero will result in more income.

Can the system be gained by corporations though? Sadly yes. One of the current 'dodges' is the tax haven. Simplistically consider a company that imports goods for sale in this country. Any profit they make is taxed. Let's say they buy the goods in at £1 and sell them at £2; ignoring costs they pay tax on the £1.

So a 'separate' intermediary is created in a tax-less country. This new company imports the goods then sells them to the old company. The new company buys them in at the same £1, but sells them to the old company at £1.50. The old company continues to sell them at £2 but is only taxed on the 50p profit. Set tax at 10% say and previously the company as a whole keeps 90p out of every £1; the new way the company keeps 95p out of every £1.

With the negative flat tax have the new company sell the goods at £2.50 and the old company sell them at £2.00. Minus 50p profit at 10% they're owed 5p the company as a whole makes £1.05 for every £1 - oops!

Of course a company selling goods at a price lower than they've paid for them is rather obvious, but difficult to enforce at a legal level - would a government set a law preventing the sale of goods below the initial purchase value? Consider clearance sales etc. where the cost of maintaining space for a product is outweighing the profit derived from its sale.

So there are some loopholes, which ironically are mostly the same loopholes that already exist; however if they can be removed in my opinion a flat negative tax would be a benefit.


Orphi said...

It's an interesting theory, but it won't work in practise.

The simple fact is that some people need more money than others. It depends on what the local cost of living is, how many dependants you've got living with you, etc.

I remember at school we studied the old Poor Law. That was several centuries ago, and to this day it seems nobody has managed to get it right yet.

- We want to help out the poorest people in society.

- But if people can get money without having to work for it, what is their incentive to work?

- OK, so we only want to help people to deserve to be helped.

- Right, but how do you define that?

- Unfortunately, you can only define who is worthy in terms of objectively measurable things.

- For every such definition, there is almost always a way that you can game the system to get more than you rightfully deserve.

This seems to be basically the problem that governments have been struggling with for centuries. Give people with children more help, and suddenly everybody starts having more children. (As short-sighted as that is.) Give people more help while they're looking for work, and they stop actually trying to get work. And so on and so forth.

To my mind, any system where you can get more money by not working than by working is just wrong. I'm not saying that unemployed people should get less money, but rather that employed people should get more. Any job that pays less than your benefits does obviously isn't a job worth having.

Beyond that… I have no answers. And neither does anybody else, apparently.

FlipC said...

I agree on the cost of living being a problem, yet the current system does little to address that beyond divvying up the country into London and not-London.

As to "Any job that pays less than your benefits does obviously isn't a job worth having" that's the benefit of the Negative tax. Any income is better than zero income. Rather than the £4,800/year for doing nothing take some minor job that only pays £1k a year and take-home pay is now £5,600/year.

Need to accommodate children etc. simply alter the personal allowance. Let's say £5k per child under 16. Once again earning any money will always make more money.

No rubbish about whose tax allowance it goes onto with a two-parent family because the end result is always going to be the same.

Hell if the government want to get all preachy they can apply the allowance to both parents if they're both looking after the child thus 'preserving the family unit'.