I think I’ve further cocked my chances of ever writing for The Guardian with this little piece at the Adam Smith Institute. Shame isn’t it?
Timmy Elsewhere.
10 responses
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This, obviously, is obvious, but if you start taxing people at a flat rate when they cross X income threshold, that’s weird: You’re making £11,430, you get a 5% raise, they promptly start taking (for example) 30%, and now you’re making £8,400? I think for some people a raise like that may not be a very powerful incentive.
So what am I missing?
Tim adds: The tax only applies to that part of your income above the allowance. Thus at 11,000, tax is zero, at 13,000 is is 220, or 22% of the 1,000 above the limit. -
Tim I don’t understand that article. At one point you say that the ASI proposal would reduce government revenue by £50bn and at another you say it would be revenue neutral.
Tim adds: No, Walker says it would reduce revenue by 50 billion. I say that it is revenue neutral “within the plan’s assumptions” (or some such) those assumptions including the Laffer Curve stuff which Walker is at such pains to dismiss. -
“No, Walker says it would reduce revenue by 50 billion.”
No, the ASI report does. If it then goes on to wave the supply-side magic wand and say that this will somehow be wiped out by harder-working millionaires, then that’s just assuming away the problem. Like you say, we have no idea where we are on ‘the’ Laffer curve (though of course there is no such thing as a national Laffer curve).
I do hope the Tories run with this idea though, as it will ensure that they get massacred at the next election for wanting to cut £50bn from public services.
Tim adds: As we don’t know where we are on the (many) Laffer Curves, what should we do then? Raise taxes and see if revenue falls? Lower them and see if they rise? Leave everything alone as we’ve got a Goldilocks economy? -
“No, Walker says it would reduce revenue by 50 billion.”
No, the ASI report says that. If it then ‘assumes’ that the supply-side magic would wipe that out, well, that’s just assuming away the problem. If the Tories do pick this up and run with it, they’ll get hammered by everyone else for wanting to cut £50bn from public services, and they’ll be massacred at the next election. For that reason, I sincerely hope they do. -
Hmm, stupid Typepad gave me an error message then posted my first comment attempt anyway. Oh well.
“what should we do then?”
Not make decisions on the basis of fantasyland supply-side projections, that’s what. -
I think Tim’s point about what we are doing with the other £450bn is not to be overlooked. Any party that runs on the basis of bribing people to vote for them with someone else’s money can always take the moral high ground over the untennable “cuts in public spending”. public spending on that basis will never decline. In essence it is reducing the incentive to vote for someone if they are able to offer you less than before. However, if you can incentivise enough people to vote for you because you can keep more of your own income before giving any up to the state. The trick is to work out where you need to position yourself on that political curve. Is it £12.000 and 22%? I’ve no idea, but it is certainly a subject worth discussing
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Tim – Oops! I’ll read more closely next time. Thanks.
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Hum I got an error message too and I think that David Walker looks to be much more in command of the report’s contents.
The ASI report says that the plan would not be revenue neutral; it says that it would be revenue negative by £50bn. It then nets off against this a saving of £12bn worth of tax credits, which is borderline OK to do, and claims that the rest of the revenue loss could be made back in three years either with efficiency improvements or with a 0.3% increment to GDP growth (I don’t actually agree with this estimate; for one thing it doesn’t seem obvious to me that the tax base would grow 1:1 with GDP under this arrangement). This isn’t a revenue-neutral proposition. -
bitheway, Tim, how does support for a flat tax square with your occasional grumbling at the first Brown budget for simplifying the tax code by removing Advance Corporation Tax?
Tim adds: He did? That was rather before I was blogging and paying attention. 1997? I was living in California.
I have grumbled about the way in which pension funds no longer claim back the standard rate tax paid by the company before distribution of dividends….which is what ACT is. My impression is (and will admit I could be wrong) that that budget did not remove ACT. It removed the rebate of ACT on dividends paid to pension funds.
On the larger scale I’m perfectly happy with ACT as it’s a simple way to get the income tax on that income. But those organisations that shouldn’t pay income tax should be able to reclaim the ACT.
The bit I really don’t like is Corporation tax, that is, the tax on retained profits. I’m perfectly happy with the idea that “unearned income” pay the same tax as “earned”. But why next year’s retained earnings to invest in the business should be taxed is less clear. -
Noop, passed in 1997 and enacted in 1999, the UK is a classical corporation tax system and ACT is one for the history books.
Tim adds: I looked itup and you seem to be right. CT is paid on all profits, retained and distributed, at the same rate on a quarterly basis.
The net effect is that pension funds etc cannot reclaim that tax paid. (Which is what I complain about).
[those organisations that shouldn’t pay income tax should be ]
Tim adds: If we have a tax protected pension system then this would be a useful tax for them to be protected from, yes?
under a flat tax system, which would these be??? If you’re going to have tax-free savings vehicles in your system, then it is going to be pretty hard to describe it as a flat tax.
Tim adds: As we don’t now have a flat tax system whether pension funds should be getting tax relief is a slightly different question, no?
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