Tuesday, October 11, 2005

Fair's fair?

Just a quick post on the nature of fairness.

This week there's been a fair bit of talk by George Osborne and others within the Conservative Party about the possible introduction of flat tax as a fairer system of tax than current income tax. Fairer, because it sets a basic rate of tax which everyone is liable to pay with no sector being discriminated against.

What got me thinking about fairness is that this system is clearly both fair and unfair at the same time. Charging everyone the same rate certainly does seem fair, but it means different things to different groups, which means it's not fair.I think the difference is between fairness and universalism, which seems to be the main distinction between the two extremes. Basically, flat tax is universal because it applies everyone equally even though the effects may not be equal. Another example would be the British legal system, which is also universal in principle but, for example when levelling fines, doesn't take into account a persons capability to pay that fine with the charge being the same whether the individual is rich or poor.

Now obviously we feel that our legal system is reasonably fair (well maybe not, but it's not like we're rioting in the streets just yet). So maybe a flat tax is fair too? Well, no. Not really.

Even exempting the poorest from paying any tax at all, the real winners from a flat tax are the really high earners whose tax rate under flat tax would drop from 40% to 22%, saving them huge amounts of money each year and completely belittling the extra £1000 that someone of minimum wage would get. Anybody between the cut-off point for not paying flat tax and the current higher tax rate would suffer massively, and that group would likely consist of the average wage earner at around £22'000. With some losing greatly and others gaining even more, it can hardly be called fair, now can it?

Basically, we what have is a new type of tax to help a small minority disguised in word which make it sound like it's equal and fair. What we're actually getting is a tax break for the rich, with a little sweetener for the poor as some thinly veiled attempt to buy them off. It's not fair in the slightest, and, most laughably, the person that wrote the book on which the idea is based doesn't think it will work.

Thing is, we seem to be entering a phase where the Conservatives have realised they need to engage more people and gain more than just right wing support. They some very promising young members in David Cameron and George Osborne and for a change it seems like the Tories might be making some progress. (Mat has talked about the possibility of a Lib-Dem/Tory alliance along a new axis of politics elsewhere and he's not wrong) But this is clearly not a move which is going to bring the Tories back to the centre, it's just a new policy designed to make the rich richer and screw everybody else. The whole point of trying to help the poorer sections of society is to give them a better chance of doing as well as everybody else, and taking money away from them isn't the way to go about it. When it comes to money, some people do need more of a leg up than others. It's hardly 'positive discrimination' to support the more needy in society over those comfortably well off - maybe it's not universal, but it's certainly more fair.


lascivious said...

I think the point is that you set the level of flat tax to benefit everyone - i.e you lower the tax burden for everyone. My current total tax burden is around 38% (national insurance, council tax, income tax etc...) and I am not too far from your golden £22k. I would love to have a flat tax of 22% - it would reduce my tax burden by over a thousand pounds per year.

A flat tax would give the unemployed incentive to work, it would give me incentive to work harder and it would give the super-rich incentive to live in this country. It might not work perfectly, but it has to be better than the current overly-complex system where the rich either leave or they employ accountants to devise tax avoidance schemes. And there would also be no scope for increasing taxes 100 times in 8 years, as the increases wouldn't be sneaked in through the back door.

Simon Jester said...

The idea of a flat tax has been around a very long time - it is somewhat inaccurate to describe Brian Reading as its "inventor".

And if he really thinks that the tax system has been simplified, then I've got to know what he has been smoking - and where I can get some.

PaulJ said...

Hang on a minute. Why exactly would someone avoiding tax suddenly gain a conscience because the tax level came down? I mean, if you're avoiding tax, you're paying 0% tax, so why would you be happy to pay 22%? If you can afford to avoid tax and think the risk if worth it, you're going to do it regardless what the tax rate is. Yeah, some people might stop, but would the amount they contribute make up for the huge amount of tax we're losing by letting the rich off 30& tax?

Secondly, as far as I can tell from the Adam Smith Foundation and Conservative Party proposals, flat tax wouldn't replace your council tax, national insurance and so on - your tax burden for everything else would still be as high. Even the Adam Smith Foundation admits that the middle bracket tax payers 'may or may not' save money depending on how much taxation they are already avoiding.

Thing is, the higher they raise the exemption range, the fairer the system would be because it would help out more people who really need tax breaks through allowing them to not pay tax in the first place. But the higher the bracket goes, the more it costs as a whole.

I'm not really an economist, so I can't really offer the perfect solution to our current tax mess. I agree that we need to do something, and I even agree that we could do more to help some high earners if the benefit of of keeping them in the UK is worth it. I just don't see flat tax as the way to do it though.

MatGB said...

Paul, I think the idea is that the tas avoiders aren't paying 0%, they're simply paying much less than they should be and paying accountants to help them avoid a lot more.

The idea with flat tax is that it cuts that out completely, there are no loopholes or exceptions, all income is taxable at the same rate, no tax benefits, etc.

That's my understanding. But then, I'm not an economist either, and I can definately see that the middle ground would be worse off, so I dislike it.

I like the basic ideal of redistribtive taxation, as long as it isn't exorbitant. Tha'ts why I'm not a fan of VAT at the current high rates either.

Friend of mine lost his job recently for medical reasons, his doctor signed him off for ages. He and his family are better off with him out of work; that's where the real problem lies, the marginal tases on the lower paid families. Flat tax could help that, but if 90% of us are worse off, then I don't think it's going to help enough of them.

superclosetnerd said...
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