« Timmy Elsewhere | Main | Polly and Ken »

August 22, 2006

Polly on Taxation

Good lord, the old gel is getting confused:

Bill Rammell, the higher education minister and MP for hyper-marginal Harrow West,

As noted in the comments, actually for Harlow.

This week City dealers' bonuses soared higher than ever, to £21bn, dwarfing the £3.3bn tax take from all their inheritances.

Sorry, did we slaughter all the bankers this year so that their estates are subject to inheritance tax? You know, for this tax to be payable there’s one event that has to happen: someone dying?

Inheritance tax is already weak. The late Roy Jenkins called it a voluntary tax paid by those who distrust their relatives more than they hate the Inland Revenue: most of the rich give away large sums before they die.

Yes, quite:

Meaning to plant a Blairist flag to keep middle England inside the New Labour coalition, he ended up rousing the powerful passion for social justice that resides in most Labour MPs. Warning that Tony Blair's departure (and electing Gordon Brown) could mean the loss of the south, he unexpectedly galvanised the party against the kind of Blairism that deliberately ignores obscene inequality.

That’s why abolishing inheritance tax will have very little effect on "obscene inequality". Because the million and billionaires don’t actually pay it.

The wise rich worry about leaving fortunes to their children. Warren Buffett, giving away most of his £44bn, says: "A very rich person should leave his kids enough to do anything but not enough to do nothing."

Well, actually, he put $6.7 billion into the traditional form of family charitable trust that will feed his descendants for many generations to come. Free of any inheritance tax, in fact, in the future, that sum will be free of capital gains, income tax and anything else tax, so long as 5% is spent each year. That 5% can include charitable giving, of course, and it can also (and does and will) include paying his descendants to manage that money, the returns to which carry on rolling up tax free from here until doomsday. Oh yes, a wonderful example of eradicating "obscene inequality".

Very few ever pay inheritance tax. Just 37,000 estates paid it last year, out of 600,000 deaths. Byers bandied about the mendacious figure of 1.5 million people now caught by it, arriving at this by crudely adding up the homes of the living worth over the £285,000 inheritance tax threshold (it rises to £325,000 next year). But by the time they die, most of these will have downsized their homes, spending much of it in retirement or giving it away to children.


Giving it away to children?

...most of the rich give away large sums before they die. If they survive for a magic seven years, they pay nothing. It loses the Treasury untold billions, and no one can explain why this seven-year loophole exists.

Polly wouldn’t be saying that many people don’t pay inheritance tax, so we needn’t worry about it, because they take advantage of tax law loopholes that she would like to see closed is she? No, she can’t really be saying that can she?

Social democratic Sweden recently abolished inheritance tax, but has a property tax instead.

I believe we have a property tax in the UK as well. Called Council Tax. What she means of course is a wealth tax (which Sweden does have at 1.4 % of assets, although the valuations of housing are pretty odd leading to gross undervaluations) but then apparently she’s too ignorant to know the difference.

The Bow Group, a Tory thinktank, calls for a 1% levy on all property over £70,000, with a 38% flat tax to simplify the whole system and make it more socially just at the bottom. Simpler flat taxes need not be regressive: the Joseph Rowntree Foundation has just published a report from the poverty researcher Donald Hirsch and the Institute for Fiscal Studies, which suggests a flat rate of 35% could lift many out of the poverty trap at the bottom.

What I think she’s missed (certainly she has about the Bow Group, less sure about Rowntree and the IFS) is that this also involves the merging of the NI and income tax systems. It leads to a dramatic fall in taxation on higher incomes. She wouldn’t like that. Also, as noted in the comments:

"(George Osborne) is the man who flirts with flat tax, the simplest tax of all - but also the most regressive, taking the least from the wealthiest."

Polly Toynbee 2nd June 2006


"The Bow Group, a Tory thinktank, calls for a 1% levy on all property over £70,000, with a 38% flat tax to simplify the whole system and make it more socially just at the bottom. Simpler flat taxes need not be regressive: the Joseph Rowntree Foundation has just published a report from the poverty researcher Donald Hirsch and the Institute for Fiscal Studies, which suggests a flat rate of 35% could lift many out of the poverty trap at the bottom."

Polly Toynbee  Today

Still, perhaps we should thank heaven for small mercies. She has at least grasped the point that flat taxes can, dependent upon the personal allowance, be more progressive than the current system. As are, indeed, all the diferent variations being floated.

August 22, 2006 in Taxes | Permalink

TrackBack

TrackBack URL for this entry:
https://www.typepad.com/services/trackback/6a00d8341c2d3e53ef00d83431187553ef

Listed below are links to weblogs that reference Polly on Taxation:

» Flat Tax - A simplified view from Politicalog
Socialist opponents of flat tax will often use the arguments that progressive taxation is a fairer form of redistribution and that flat tax would unfairly compensate the well off. I thought I would challenge this assertion by looking at some actual fig... [Read More]

Tracked on Aug 22, 2006 1:17:42 PM

Comments

"What I think she’s missed (certainly she has about the Bow Group, less sure about Rowntree and the IFS) is that this also involves the merging of the NI and income tax systems. It leads to a dramatic fall in taxation on higher incomes. She wouldn’t like that."

No, the JRF proposal leads to a fall in taxation on middle incomes and an *increase* in taxation on higher incomes. And you probably wouldn't like that - I know the Adam Smith Institute certainly wouldn't.

Tim adds: Looking at the paper they model four different versions of the flat tax, none of which provide higher marginal rates than currently for higher earners. (Taking the assumption, as I do, that employers’ NICs are actually paid from employees income).

Posted by: Jim | Aug 22, 2006 8:04:37 AM

What the hell is "hyper-marginal" supposed to mean? This is awful English for a journalist.

Posted by: Tim Newman | Aug 22, 2006 8:13:21 AM

One wonders whether we would have ever heard of this moron had the earlier generations of Toynbees been forced to divest their wealth in the manner she favours.

When Guardian readers start to fall liable for this tax - and they are - I'll be interested to see how Polly's Leninist economics continues to be received at that publication.

Posted by: Johnathan Pearce | Aug 22, 2006 8:15:41 AM

Tim, see Fig 12 here: http://www.ifs.org.uk/bns/bn72.pdf

Tim adds: Of the four options two do....but, as I say, they’re not including employers’ NIC

Posted by: Jim | Aug 22, 2006 8:26:47 AM

Flat taxs are not more progressive than a non flat-tax for the simple reason that you can simply add a higher band to a flat-tax and make it more progressive.

What you can do is exempt many earners from the tax system altogether, which is not quite the same thing. But of course you can do this with a non flat-tax, and more progressively, if you assume the same loss of income.

The way you mean is trivially true, much like saying a Kia can go faster than a Porsche, particularly if the Porsche hasn't been started. The slight difference being that in the real world everyone's seen Kia's going faster than stationary Porsches, but they haven't seen a progressive flat tax.

Posted by: Matthew | Aug 22, 2006 8:44:18 AM

I wonder who originally conceived a flat tax, and whether (s)he is happy for the myriad of schemes currently being proposed to be so described.

Flat taxes = no personal allowance. At all. That's the point - once you introduce a personal allowance you lose much of the benefit of having a flat tax. For example, employers are forced to maintain (as they do now) tax codes for each employee so they can ensure that the personal allowance is being treated properly. Under a 'pure' flat tax system the employee can merely withhold a portion of each pay packet and hand it over to the Government, safe in the knowledge that this will result in the correct withholding for the employee.

And you can't "simply add a higher band to a flat-tax and make it more progressive". Not if you want to maintain a flat tax system, in any case.

As for Polly getting her knickers in a twist - again - one wonders whether she would be better off starting from first principles. What level of public spending do we need in this country? 45% of GDP? 50%? 35%? And then how should we go about raising that revenue in the least distorting way? Arguing that withdrawing IHT will hurt 'hard working families' when in fact it's very likely indeed to help exactly that audience isn't going to help her argument.

Posted by: andrew | Aug 22, 2006 9:52:36 AM

"And you can't "simply add a higher band to a flat-tax and make it more progressive". Not if you want to maintain a flat tax system, in any case"

It wouldn't be a flat tax, that's the point.

Posted by: Matthew | Aug 22, 2006 10:47:09 AM

One thing I fail to see about 'progressive' taxation is why it is okay for the rich to pay a higher proportion of income in tax.
I fully understand why we have a personal allowance, and why most flat tax proponents support increasing it (all these nasty right wing nutcases wanting to let the poor keep more of their money) but to raise taxation rates for higher income people makes little sense to me, except if you want to boost jobs in the civil service and acountancy...

Posted by: Tristan | Aug 22, 2006 11:47:47 AM

Inheritance tax is a disgrace. As is Polly Toynbee. I have submitted my own rant to my new-ish blog.

Kind regards,

Snob

Posted by: Reactionary Snob | Aug 22, 2006 1:12:49 PM

Flat taxs are not more progressive than a non flat-tax for the simple reason that you can simply add a higher band to a flat-tax and make it more progressive.

Actually, depending on how you structure the personal allowance and tax rate, a flat tax can be more progressive than our current system.

My own rather simplistic take on the subject can be found here.

Posted by: Allan Scullion | Aug 22, 2006 1:13:48 PM

In the real world, flat taxes always have a personal allowance. It is this allowance that makes the tax progressive. I pointed this out here a while back, but it bears repeating. Obviously we can ignore those at and below the threshold: they pay no tax at all. If you earn more than the threshold, the tax you pay is (income - threshold) x rate.
Allowance: 10,000,rate 0.20
Income 20,000 tax = 2,000 = 10% of gross
Income 200,000, tax=38,000 = 19% of gross
So person B on ten times A's income pays 19 times as much tax.

The graph of the effective tax rate asymptotes to a line: two people on incomes x and x + δ the second pays more proportionally, not merely in absolute terms. That's the definition of a progressive tax.

Posted by: David Gillies | Aug 22, 2006 5:15:25 PM

It also bears repeating that it's not a flat tax system if it has a personal allowance, as there are two tax rates, 0% and Flat%. The term should be 'less graduated tax' or something like that. The size of the personal allowance is of course unrelated to the flatness of the tax - the UK's has got smaller as the tax has got flatter.

Posted by: Matthew | Aug 22, 2006 6:56:19 PM

It also bears repeating that it's not a flat tax system if it has a personal allowance, as there are two tax rates, 0% and Flat%.

I think the distintion is unimportant. To say that 0% is a "tax rate" is almost meaningless.

Posted by: Allan Scullion | Aug 23, 2006 12:28:06 PM

On the contrary. Many of the supposed benefits disappear once you allow the personal allowance.

Posted by: Matthew | Aug 23, 2006 7:07:56 PM