Friday, September 14, 2007

Britain, the tax haven, and flat taxes

The International Herald Tribune has published an article saying that Britain is a tax haven. As many Britons know by now, this is true. Then it goes further, trying to argue that this is a good thing for Britain. And it finishes with this line:

If Britain had a flat tax of, say, 15 percent, there would be fewer complaints about how little the super-rich were paying.

Well, TJN thinks that flat taxes are generally a bad idea. We're not alone - serious people at the IMF (and many others) do too. This was noted in a story in the Financial Times last year, entitled "Flat taxes could be a flash in the pan, IMF research says." Among other things, the IMF argued:

- Except in Russia, the second wave of low-rate flat tax reforms have been associated with a reduction in revenue from personal income tax; in Russia a rise in the tax receipts were not due to the flat tax but due to other economic factors (such as rising energy prices and a wider economic recovery after an economic slump)

- There seems to be no sign of the "Laffer effect"

- There is no evidence that flat taxes have had a strong effect on work incentives

- While flatness itself is certainly a simplification, the rate structure itself is commonly not the primary source of complexity in taxation, which comes more from exemptions and special treatments afforded to sectional interests.

- Flat taxes that have been adopted do not provide a coherent framework for dealing with the difficulties that almost all countries now perceive in taxing internationally mobile capital income.

- The sustainability of the flat tax is unclear.

Richard Murphy had an interesting interview with Alvin Rabushka, who might argue that he is the man who invented flat taxes. About the redistributional effects he said:

The only thing that really matters in your country is those 5% of the people who create the jobs that the other 95% do. The truth of the matter is a poor person never gave anyone a job, and a poor person never created a company and a poor person never built a business and an ordinary working class guy never drove economic growth and expansion and it’s the top 5% to 10% who generate the growth for the other 90% who pay the taxes to support the 40% in government. So if you don’t feed them [i.e. the 5%] and nurture them and care for them at the end of the day over the long run you’ve got all these other people who have no aspiration for anything more than, you know, having a house and a car and going to the pub. It seems to me that’s not the way you want to run a country in the long run so I think that if the price is some readjustment and maybe some people in the middle in the short run pay a little more those people are going to find their children and their grandchildren will be much better off in the long run. The distributional issue is the one everyone worries about but I think it becomes the tail that wags the whole tax reform and economic dog. If all you’re going to do is worry about overnight winners and losers in a static view of life you’re going to consign yourself to a slow stagnation.

Well, not too many people are going to agree with extreme views like that. Read Richard's series of articles and a research paper about flat taxes, to understand some of the other arguments against flat taxes. Plenty of people, whether guided by ideologies or vested interests,will undoubtedly continue to bang the drum for flat taxes, and it's possible that other countries will still try and jump on the flat-tax bandwagon. "The more interesting question," the IMF working paper concluded, "is whether there will be any defections."


Blogger Unknown said...

"Well, not too many people are going to agree with extreme views like that" - Sorry but I cannot see why those views are extreme. Based on my experience of life, they seem like common sense. But then I'm just a middle-aged guy with a job in industry not a journalist, academic, teacher, bureaucrat or trade unionist.

5:46 am  

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