We are developing the social individualist meta-context for the future. From the very serious to the extremely frivolous... lets see what is on the mind of the Samizdata people.

Samizdata, derived from Samizdat /n. - a system of clandestine publication of banned literature in the USSR [Russ.,= self-publishing house]

Feeling a little flat

On first viewing, my instinctive reaction would be to punch the air with triumphal joy:

Flat taxes, once a fantasy of free-market ideologues, are sweeping across the European Union and could be introduced in more than 10 of the bloc’s 25 member states.

The European commissioner for taxation, Laszlo Kovacs, described flat taxes, – one rate for all income and corporate taxation – as “absolutely legitimate” and said Western European nations may be tempted to adopt them. His comments will fuel debate that low-tax, low-cost economies of the East are undercutting Europe’s industrial heartland.

However, and in my experience, this needs a second viewing and even a third viewing.

First off, what they are sloppily referring to here is not ‘flat tax’ but actually ‘flat-rate tax’. The prospect of a flat tax (however remote) would most certainly have me breaking out the bubbly.

Secondly, let us assume that Mr. Kovacs and his posse somehow manage to persuade Western Europe’s nabobs to swallow this idea and go with the flow. I would not put it beyond them to agree to a flat-rate tax and then set the rate at 60%. The fate of politicians in Western Europe is decided almost entirely by their bloc-vote public-sector clients and they are not going to kick them in the teeth any time soon or at all.

Thirdly, there is no mention at all of what happens to the various extant reliefs and allowable deductions. A great deal of the complexity in the tax system results not from calculating the rates but negotiating the brain-fryingly difficult issues of the applicability of reliefs and the legitimacy of deductions. Hence, simply establishing a ‘flat-rate’ will not simplify the system to any material degree. Furthermore, it is only those reliefs and deductions which save many businesses and self-employed people from being bled white.

This could all turn into a lamentably hollow ‘victory’. I can easily see HMG apparently agreeing to a ‘flat-rate tax’ and even agreeing to set it at a reasonable level and, while we are all celebrating, promptly announce the abolition of all reliefs and deductions which would result in a great many people paying a lot more tax and not less.

No, I am not happy. Not yet anyway. There are far too many devils lurking in the detail.

Tweet about this on TwitterShare on FacebookShare on LinkedInShare on TumblrShare on RedditShare on Google+Share on VK

21 comments to Feeling a little flat

  • Bernie

    I think you are quite right to be sceptical. I wouldn’t exactly break out the bubbly at a real flat tax as it would still be a tax but I get your point.

    Even if the idea of a real flat tax that applied to everyone equally were to overcome the Marxist notions of “fairness” it wouldn’t happen because it would make taxes too transparent and therefore their monstrousness too apparent.

  • dunderheid

    I think they’re is greater cause for celebration here than your allowing, albeit i as well am holding back on opening the really expensive champagne…I might spring to a round of beers.

    Firstly the likelihood of governments setting a flat-rate at anything above 25% is remote precisely for the reason that flat taxes have been demonised by the left for so long. A flat tax is regressive in that it takes less from those with the most and takes the most from those with the least. Therefore there is a powerful motive for setting your flat rate as low as practible to minmise this “unfairness”

    Setting your flat rate low also allows you to remove all deductions and reliefs. Businesses faced with a flat corporation tax of 15% should have no other need for reliefs or deductions

    Removing the complexity that all these deductions etc build into a tax system means the administration costs are cheaper meaning taxes can be lower still. It also removes any scope for tax avoidance schemes and as the Economist magazine pointed out recently means that the rich end up paying more tax than they pay under so-called progressive schemes with varied tax rates.

    It also has the benefit of putting lots of tax lawyers and accountants out of work…..actually I think I will open that champagne after all

  • Julian Morrison

    A flat-rate tax set too high is still an improvement. It can easily be seen to be set too high. Market forces can get a firm grip on it – it’s plainly obvious where to take your business if one country has a flat rate of 22% and the other, 60%. In addition, the flatness of the rate pushes the “brain drain” to all sectors of society. It no longer allows politicians to play off envy and reserve special punishment for “the rich”. Even the very poorest taxpayer in the 60% country would have more money if he voted for a cut, or if he crossed the border to work in the 22% country.

  • dearieme

    Pensions: under the new arrangements from April’06, the old “Tax Free Lump Sum” will be replaced by the “Pension Commencement Lump Sum”, a change of name that is as clear a signal as you’ll get that THEY plan to tax it. And THEY want to revalue your house for Council Tax which will also make it easier to apply Capital Gains Tax on house sales, specifically to the difference between what you receive and the Council Tax valuation. Do you fancy Flat Taxes on these?

  • John Rippengal

    I suggest that any flat tax should be accompanied by NO allowances either, for two reasons:

    First from a political point of view currently those on minimum incomes and benefits which are not taxed are happy to vote for free anything and a party that promises this will always have an advantage. It is imperative that a vote for handouts ‘free lunches’ is seen to affect the pay packet through the tax deducted. You might say that benefits are at a minimum level and one cannot live on less. OK then increase the benefits initially to compensate for the first imposition of the flat rate tax; but not subsequently.

    Secondly it simplifies even more the administration: no arguments about which deductions are allowable.

    There could also be a rethink on business taxes, VAT etc to rationalise, simplify and to reduce administration. To hack down Her Majesty’s Inland Revenue to, say, 5 percent of its current size is one thing but to slaughter great swathes of unproductive tax accountants and lawyers would be of maybe even greater benefit.

  • Jacob

    What matters is not the “flatness” of the tax rate but it’s level. Less taxes is better than more, it does not matter so much if they are flat or progressive.

    If you need the slogan of “flat taxes” in order to be able to push through a tax reduction – fine. But the chances are that the oportunity will be used to push a tax increase. So skepticism is in order.

    Usually reform advocates (ex. GWB) propose a “revenue neutral” scheme. To this I say – don’t bother. Save your energies for some more useful initiative.

  • toolkien

    The fact must be faced that once it is felt that a tax is needed, there is no easy method to collect it. Apparently all a flat-rate accomplishes is removing the relatively easy task finding the amount of tax due on a stepped up rate system. That’s pretty easy, especially compared to the navigation required to come down to taxable income.

    As has been stated, there is complexity in all the deductions and credits, etc etc, many of which came into existence as part of public relations gimmicks and feel goodism. But even if all these special deductions and credits were done away with, there would still be complexities in defining what income is (a return of investment of course should not be income) determining basis, legitimate expenses in the conducting for-profit enterprise (unless the tax on gross revenue is very, very low). Net worth taxes can be very unfair for companies that are in a down cycle.

    At the end of the day, though the complexity of the tax code from politicking is there, it still isn’t going to be a hugely simple matter even if there is a flat tax doing away with them. Defining what cash flows, or property held, should be subject to tax still requires definitions, definitions that never will be universally fair. And since it never will be a cinch to define, it gives huge power to those who do the defining, to sell special consideration for continued support, and the cycle is born anew.

    And, of course, any change to how taxes are collected don’t really matter much unless the ability to deficit spend isn’t curtailed too. A proper tax structure can never exist until what it is needed for is sanely defined. Unsound ‘balance sheets’ can only lead to unsound ‘income statements’ and the methods needed to derive revenue thereon.

  • Winzeler

    Toolkein, if what you’re saying is true, then a true flat tax (as opposed to a flat rate tax) is the only way to simplify taxes.

  • toolkien

    Toolkein, if what you’re saying is true, then a true flat tax (as opposed to a flat rate tax) is the only way to simplify taxes.

    I must not have been clear (not for the first time). What I am saying is that once taxation is considered necessary, there is no easy way to collect it. No matter how it is defined, it will be unfair to someone. If certain someones are powerful enough, they will gain access to the decision makers, and will adjustments will be made. Simply put, there is no simple tax.

    Again, it is not only ‘deductions’ or ‘credits’ that have to be defined, it is what constitutes ‘income’ as well (such as ‘in kind’ compensation by employers, don’t even get me started on this matza ball). And the concept of investment and return of capital. And (the US) tax code recognizes GAAP (and its accrual method) which applies to both INCOME and expenses. The whole concept of matching inherent in financial presentation is still inherent in tax determination of gross income to net income (unless of course we’re going to have one set of demands by the SEC for book accounting that seeks the longterm and going concern, and another by the IRS which seeks to jump on any dollar that moves). Unless a tax system is defined that simply taxes cash flow in (I assume cash flow out is disregarded), it will be complex regardless of the additional gimmickery by Pols for votes.

    At the risk of becoming really wooly, it all comes down to the fact that a system of taxation is steeped in uniform valuation which is anethma to libertarians. No two situations, by individual or by company, are the same. Asset rich and cash poor is different than cash rich and asset poor, which is different from being both asset and cash poor, etc etc. Should the system tax short term success, or long term success (i.e. tax income or wealth?). Should taxes be assessed against static property (even that which is not held for productive use) or should transactions be taxed since that is where the cash flow is flowing most readily (but this doesn’t take into account is the flow by and large in the start up phase or the cash cow phase?- it would be punitive to assess a tax on risk takers who have yet to succeed).

    So the real question boils down to is tax going to be done on a pure cash basis? or a modified cash basis that recognizes debt? or some further hybrid basis, because once anything other than a cash basis starts, so does the complexity (setting aside the complexity that will arise as bartering skyrockets under a pure cash basis and how such is to be taxed).

    So I guess what I am arguing is that need to end taxation as we know it altogether. Flat taxes are somewhat of a pipedream IMO. Until that State is first punctured and the hot air is let out, and a reset occurs in the muddled system of valuation brought about by massive collectivism, the tax burden will be consequently large enough that no fair, yet simple, system will ever be devised, and that the pre-existing collectvist mentalities will demand an equally muddled method to pay for it. One begets the other.

  • Winzeler

    I personally agree with you. After the system crashes, if the opportunity arises for a libertarian society to emerge, and if it seems appropriate for some taxation (I can’t imagine yet if there is any appropriate taxation -haven’t completely thought it through), then I don’t know what I would advocate. Taxation is never fair and rarely simple. More than likely, I think a voluntary sort of taxation would work. It’s just a hunch, but I think a libertarian society would contain enough benevolence to function.

  • Agent Smith

    A flat tax is regressive in that it takes less from those with the most and takes the most from those with the least.

    A flat-rate tax is not regressive. A real flat tax would be. A regressive tax is one that costs the poorer more in relation to their income. VAT, for example, is highly regressive. A flat-rate tax is not progressive either – it’s just neutral.

    Furthermore, it is only those reliefs and deductions which save many businesses and self-employed people from being bled white.

    The whole point of a flat-rate tax system is to eliminate all these deductions and reliefs and simplify the system.

    OK then increase the benefits initially to compensate for the first imposition of the flat rate tax; but not subsequently.

    If a flat-rate tax was introduced in the UK, there would be a far larger personal tax-free allowance than now. This means that a large minority of the population will not pay any income tax at all. I, personally, think this a good thing, but there is the risk of this minority demanding more and more spending by the government. But, this is arguably better than the current situation where people are far more reliant on the state – the governement taxes you then repays you in tax credits or other benefits. With a flat-rate tax, low income earners keep more of their money are less dependent on state handouts.

  • Bernie

    Tookien writes “I must not have been clear (not for the first time). What I am saying is that once taxation is considered necessary,”

    I was right along with you up to there.

  • Stehpinkeln

    Combine the flat rate tax with a consumption tax (VAT). Get rid of income tax and there will be no arguements over just what is income. Plus it can be a very low rate, since a comsumption tax is levied every time that dollar (euro) is spent, not just once when it’s earned. Then you spend the tax income in arrears. The budget for next year will be what was collected this year, as this years budget is what was collected last year. This cuts down on the politicians using the public till to buy votes. It will also be a useful tool in managing the economy. Too much money in circulation, increase the tax. Economy too slow, decrease the tax. This should be quicker and less painfull then piddling with interest rates. The change over would be a mess, but not any worse then what we have now. Look at the money in circulation figures compared to the GDP numbers. Revenue neutral in this case would mean dividing the per diem cost of goverment by the amonut of money being spent. The number I saw back in ’84 when I first was exposed to this idea was about 1.5%. Seat of the pants says that’s a little low, but it shouldn’t be as high as 4%. Maybe if I have time tommorrow I’ll crunch some numbers.
    The government could save a bundle by getting rid of the tax man and letting the POS systems collect the money. Taxpayers won’t ever notice, which will calm them down somewhat. Lobbyists will get fooked, but that is why they exist. There would have to be a vote on if Food, shelter and clothing were exempted. Computers and networks would allow a lot of flexiability.

  • Julian Morrison

    I posit: the very use of the word “regressive” traps you into thinking like a lefty.

    Consider: everything else you pay for is “regressive”. Why should the tax system not be? Have you accidentally accepted the left’s definition of “fair” as meaning rationed equal buying power?

  • Jacob

    Toolkien is absolutely right. There is no such thing as a SIMPLE tax system. There is no such thing as a fair tax system.

    But, if the tax RATE is low enough, the complexity or unfairness are less of a problem.

    The problem is not redefining the tax system, but redefining the role of government in society.

  • Winzeler

    It will also be a useful tool in managing the economy.

    This is a terrible concept of the function of the government. The economy is much better suited to manage itself.

  • Verity

    Well said, Winzeler!

    Governments, being passengers, have no business getting involved in managing the economy.

  • Stehpinkeln

    Verity, I have no business being stuck with going thru life fat, bald and ugly with a tiny dick, but there it is, deal with it. Government was invented to manage resources and thru that process the economy. As a neo-anarchist I agree totally, which doesn’t change the facts at all. The question about government management of the econmy isn’t whether or not they will, but how intrusive that management will be. Do you want a scapal or a meat clever?

  • Verity

    Stehpinkeln – Verity, I have no business being stuck with going thru life fat, bald and ugly with a tiny dick, but there it is, deal with it.

    Why would I take the faintest interest in your problems, never mind deal with them?

  • Bernie

    Stehpinkeln writes, Government was invented to manage resources and thru that process the economy.

    Government’s interest in “the economy” is pretty much purely in the redistribution of the wealth away from those who create it to those who would support the state. Taxes are a major part of this and not just the means of paying for government “services”. That is what needs dealing with first. If at the end of such a process there still were some “need” for government provided “services” to be funded by coercive taxes then the idea of some new kind of tax system may be on the agenda. Until then this is a purely academic theorising.

  • Delmore Macnamara

    “Combine the flat rate tax with a consumption tax (VAT). Get rid of income tax and there will be no arguements over just what is income”.

    No, instead there will be arguments over just what constitutes a “supply” or a “business activity”. Read the opinion of the Advocate-General in the Halifax case & then tell me that VAT is any simpler than income tax.

    The UK’s VAT system has the added disadvantage of fundamentally being a European tax whose _vires_ is the Sixth Directive rather than the 1984 VAT Act. The UK (or any other country’s) legislation’s plain meaning can in effect be reversed whenever it conflicts with the directive. The recent case European Commision v Netherlands concerning input tax deductions for motor fuel payments to employees is a particularly pernicious example of this.

    Look, none of this is going to get any better until it is acknowledged that the complexity of the tax system does not result essentially from the decision to tax income, capital, consumption, supply of business activities, land values, hair or whateverm. The problem is the generel level of taxation and the sooner that is generally acknowledged, the better.