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August 31, 2007

Progressive Income Taxes

It's true what the man says:

The incidence of the tax system itself also needs review. It is often supposed that the present taxation pattern is "progressive", taking a higher proportion of income the more you earn. This is only true, however, for taxes on income and capital. Indirect taxes, such as VAT, taxes on tobacco and alcohol and so on, work the opposite way, taking a higher proportion of lower incomes. Taking the two together, people pay much the same proportion of their income in taxes all the way up the income scale.

There are two obvious ways in which the system could be made more progressive. One is to raise the taxation on top incomes to, say, 50% and reinstate the starting rate of 10%, as the Lib Dems once proposed. The other would be to increase inheritance tax on the largest estates to help tackle the growing inequality in the distribution of capital.

There's actually a much better way of increasing the progressivity of the system (if that's indeed what you want to do). Simply stop taxing the incomes of the poor. Set the NI and income tax thresholds at something around our definition of poverty. Median income (in 2001, the figure I found first) was £310 a week: £ 16 k a year. 60% of median income is this £ 9,600 a year. Anyone earning less than this simply shouldn't be paying income tax or NI. (The figures will obviously be higher now, 6 years later).

Personally I would go further. Those on less than median shouldn't be paying into the pot. So the allowance would be £ 16 k come the glorious day. Some of the revenue forgone could be raised by increased tax rates on incomes over this figure (effectively, by raising the rate we'd be making up for the tax not collected on that £ 10 k or so of income not being now taxed) and the books balanced by taking a chainsaw to the spending side of the ledger. Note that the imbalance won't be quite as bad as some claim: there are people out there both being nominally taxed and then getting it back as credits: recorded as revenue and expenditure but not a real movement of money.

But this would both simplify the system and increase its progressivity. Wonder why more people don't advocate it (apart from the obvious nutjobs like myself, the ASI and UKIP and, wasn't there some muttering in the Tory Party about raising the allowance)?

August 31, 2007 in Taxes | Permalink


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I really don't know why they don't.
I'd love to hear some explanation for why the system is the way it is.
So far, all i get are the conspiraloon theories, that some illuminati/bilderberg types are controlling it all.

What really is the opposing argument?

Posted by: Biodun | Aug 31, 2007 9:38:29 AM

There isn't one. However, if the poor do not pay tax - how can you win votes (apart from as a one off) by...errr cutting taxes? The poor won't care as they don't pay anyway - all they will do is vote for the party that spends more on them - a bit like council tax now. Sadly that means that there is less of a political incentive to reduce taxation and cut spending - and more of an incentive to do exactly the opposite. Alternatively, one could argue that if you don't pay tax, why should you have a right to dictate what tax raised from others is spent upon? Now that sounds a familiar story....

Posted by: Tinxx | Aug 31, 2007 9:51:08 AM

Tim, I agree. How about starting at £12kpa, so someone on minimum wage doing 40hrs a week is not taxed? Still, the concept is the same - fat personal allowance and flat tax thereafter.

I would also suggest zero corporation tax and to tax dividends as part of income. It might need more VAT, but companies will flock to register here and our exports will be more competitive, so generating more wealth. Audits will be a piece of cake - think of the savings in admin and bureacracy!

Of course, we need to stop the nonsense of Employer NI and convert it to a true pluralistic Insurance system, as in Switzerland.

Posted by: Roger Thornhill | Aug 31, 2007 9:59:21 AM

For what it's worth, I think that the reason for all this is to create jobs in DWP and HMRC and to trick benefit and WTC recipients (90% of families, allegedly) into thinking that the government is doing something "for them".

My favourite stat, if a single adult earns £9,000, he pays £19 a week tax and NI and receives £19 WTC.

Posted by: Mark Wadsworth | Aug 31, 2007 10:48:16 AM

There will be lots of evasion opportunities for the small family business. Put the wife and two children on the wage bill and remove £48k from your taxable income.

Posted by: james C | Aug 31, 2007 11:25:25 AM

avoidance, shurely?

Posted by: tired and emotional | Aug 31, 2007 11:28:28 AM

James C, that problem would not arise if you went for a Citizen's Income tax/welfare scheme. The scheme outlinedhere equates to a personal allowance of around £9,000 for an adult, i.e. at earnings of £9,000 the CI you receive and the tax you pay net of to nil.

Posted by: Mark Wadsworth | Aug 31, 2007 12:46:40 PM

Yes, a citizen's income scheme would avoid that problem.

I don't see how tinkering with the current system by introducing very high personal allowances cpould ever work, though, due to the obvious scope for avoidance/evasion.

Posted by: james C | Aug 31, 2007 3:18:18 PM

James C, that's the clever bit.

People have a knee-jerk dislike of CI schemes, so what I'd do is give everybody a choice between
a) a CI (called Child Benefit, Income Support and Old Age Pension respectively, depending on age) but NO personal allowance on top, or
b) a much higher personal allowance (for adults, not for kids, for obvious reasons) but no entitlement to the CI.

In your example, Dad can't use the kids' personal allowances anyway (he just gets Child Benefit) and whether he uses up his wife's personal allowance to save £3k in tax, or whether she just claims the £3k CI herself is neither here nor there.

Posted by: Mark Wadsworth | Aug 31, 2007 4:15:14 PM

I used to sympathise with your line, Tim, but now I'm less sure. We all get one vote; we all pay the same fraction of our income as taxes. Seems fair enough.

Posted by: dearieme | Aug 31, 2007 6:01:14 PM

"Simply stop taxing the incomes of the poor." .... I cannot agree with this - All citizens should pay tax, it is part of the honour, priviledge and obligation of being a citizen of the country.

Posted by: johnnybonk | Aug 31, 2007 11:44:17 PM

"All citizens should pay tax, it is part of the honour, priviledge and obligation of being a citizen of the country."

Yes, I too feel honored by giving G. Brown money he doesn't deserve and will piss up the wall. And I feel especially obliging to a country that can withhold a passport when the Home Secretary, a venal politician, decides on a whim. Oh yes, I love New Labour Britain.

Brrrrr . Cancel that. We live under a Nanny State, and the nanny is psychotic. Nanny hates me. Consequently I owe the State NOTHING.

Posted by: Kay Tie | Aug 31, 2007 11:54:31 PM

Kay Tie:

The argument that the State will waste or misuse or that significant sums will find their way into corrupted pockets is, of course, true but is an argument equally valid for anyone. Like it or not, "gaming the system," whether on the giving (taxes) or receiving (benefits) side merely shunts one person's burden to the shoulders of others. Wherever a certain service level must be provided, avoidance of one's share of costs directly imposes higher costs on others--one's neighbors, so to speak; most recognize this. To the extent they evade, understanding of their guilt evokes the "everyone does it" justification. And juries trying such cases show little sympathy for defendants.

You might get the idea that I'm writing a brief for tax compliance. Or for the detached, laid-back, "philosophical" view of the matter. I'm not. I'm trying to make the point that the entire matter of taxes and the knotty problems created over and over is one of the major reasons for all to resist urges to improve existence by means of legislation--of almost any kind. Very many ---perhaps most--functions provided by the State can be quite adequately provided (usually far more cheaply) by private entities. But the chief benefit of the devolution of a larger share to private provision is not concerned with the services themselves nor even their costs. (Or even the burden of costs of their administration.) The great prize to be won is restoration of the inestimable benefit associated with the cooperation characteristic of life in society (uncomplicated by coercion except necessary suppression of antisocial behavior).

It's ironic that collectivist solutions are peddled as methods for "equal service to all," as "cooperative solutions," etc., when they actually promote ineradicable frictions between individuals and groups and reduce normal persons trying to minimize tax liabilty to the role of "free-riding" sponger.

About 150 years ago, Frederic Bastiat wrote "The State is a fictitious entity by means of which each man intends to live at the expense of his neighbor."--or words to that effect. Things have only gotten worse since then--would be my guess.

Posted by: gene berman | Sep 1, 2007 11:57:58 PM