OPINION: Flat tax - Myth or reality? By Richard Murphy

I'd be interested in some academic research by Richard Murphy on the current complex system and how that gives anybody any advantages. Surely it is nothing more than an exercise in social engineering as well. Certainly it is an exercise in confusion marketing and creating dependency on the state - and an thereby an attempt to influence voting direction.

Is there any other sort of tax policy though?

It would be nice to see the politics out of tax policy - or at least as much as possible and a return to honesty about how much things cost and the need to raise taxes to pay for them. As simple as possible, but no simpler.

A case for a flatter tax system, and possibly even a citizen's statement of account with the state.

NeilW

there is no definition provided of "flat tax". So whether it is a myth or reality is something of a leap of faith.

The article in my view has not given Flat Rate Taxation a fair review since there are the clear benefits.

In the article you conclude that promoters of Flat Rate Taxtion wish to promote four things.

Reduced taxes for the rich
Increased taxes for working people
Reduced tax on companies
Reducing the role of government

First point. The rich will have to all pay more tax no exemptions and will not be able to use Offshore Trusts and very carefully crafted schemes to avoid taxation. I should include our politicians in this category as well.

Second Point.With our current Tax Regime in the UK where huge amounts of Indirect Taxation is paid on comsumption e.g Fuel , and Vatable Purchases and necessary purchases like Gas , Oil ,Electricity etc which all bear VAT albeit at 5%.These are all paid by working people who are sometimes not in a position to afford these costs. Also a large burden of the Social Security Costs(Employer share on National Insurance) and Business Rates is passed on back to working people by being included in the cost they pay for their purchases.

Third Point. Reduced Tax by Companies. Clever Tax advisers advise the more sucessful companies on reducing their Tax Burden under the current Tax Regime whereas under Flat Rate Tax this will not be possible Tax will be paid on all Profits at a fixed rate without any exeptions.I would guess greater Tax could be collected from Companies rather than less.

Fourth Point.Reducing the role of government. This is not necessarily bad especially the Bureaucracy which wastes vast amounts of Tax Collected unneccessarily.You only have to look at the current mistakes costing taxpayers billions through sheer incompetence.In the UK vast ecomomic resources ( are allocated to recycling Tax Collected to the so called deserving unnessarily when these working people should just not be taxed The role of the State should be better targetted to providing better care and protection for all Taxpayers.Most Western Politicians have the potential to be corrupt given half a chance because they have power and influence to do almost what they like using the state resources(Currently I believe it is only the media in the UK who keep them reasonably honest otherwise lots of their actions will never see the light of day )

In conclusion our political masters will not change the current tax regime because their power base will be eroded as a fairer and more efficient way of collecting Tax to fund the state would be in place and they just might have to do an honest days work for a change to justify what they do.

You saved me making the point

Richard

You are wrong because:

(i) you do not accept that democracy can somtimes produce unfair and unjust results;

and

(ii) you do not accept that, when democracy does get it wrong, market and other forces can help put things right.

Here is another example of democracy getting it wrong to add to the ones in my previous posting.

In Germany in the 1930s the People voted democratically and freely for Hitler and the Nazis.

Surely, even you cannot deny that that was another case of democracy getting it wrong?

Steven is right.

There is no escape from a flat sales tax unless one consumes outside the UK, or does not consume at all of course (a point he fails to mention).

And whilst the poor often consume 100% or more of their income, the rich do not (just about by defintion, if you presume accumulated wealth a defintion of being rich). So such taxes are regressive despite the refund element, which is why they have been rejected as often as flat income based taxes in the USA as being unacceptable in any society with any concern for its poor and social cohesion.

Which is why such a tax would be unacceptable here, especially when you consider what the rate would need to be on top of the existing VAT if income tax were to be replaced by such an arrangement.

Another form of flat tax has been proposed in the US which is called the flat sales tax (and tabled in the house but defeated several times already).

What it does is to apply a 30% (or whatever) tax on all consumption and yet the same time, mail cheques/bacs the amount equivalent to the typical consumption of a family [correction-not company] of a particular profile to the recipient (this works like tax allowance). The business gets to keep 0.5% of the tax collected to cover administration cost. All income tax, NIC and corporation tax are to be abolished.

That can be coupled with a small currency tax (maybe 0.001%) on transfer of large sum (>£50k) abroad by a person (non corporation).

There is no escape, unless one does not consume in the UK.

I agree with "john sartoris" that unrestrained democracy can lead to havoc. The China Communist party was propelled into power due to peasant support (i.e. popular support, if there were a free election, they would win anyway as the KMT was so corrupted and the people were suffering at that time) and was happened over the next 40 years were history.
In Thailand, corrupt goverment is kept in power by promising to distribute aid to the poorest part of the country.

And yes. I agree with Matt that a "flat tax" model of this kind shall be on worldwide income (I thought the rule is that no exemption & no loop hole).

As far as I can see, you haven't given a definition of flat tax and even denied its existence in practice. You'll understand then that I find it difficult to accept that a flat tax regime exempts all foreign income from tax. I think the majority of contributors would consider it essential that any tax system taxed worldwide income.

All you seem to be saying is that IN YOUR OPINION complexity is a necessary evil to achieve your political goals. And please leave off emotional sweeping statements about conspiracies, this is supposed to be a discussion about tax not a Dan Brown novel.

what is completely flawed is the comments on eastern europe.

The simple reason for introducing the flat tax was to have the tax rate low enough so that people in the grey economy would now pay tax instead of avoid it. And if you do study these countries properly (Russia, Slovakia, Estonia, etc), it will be seen that tax collections have increased and not decreased because of it. Of course, any government who introduces it is in effect admitting that the present tax system does not work (i.e. evasion wins)and this is a brave thing to do. Perhaps this is one reason why no Western European country has tried it.

Having the corporate tax rate the same as the personal tax rate then stops all the individual entrepreneurs (a significant amount of the population in Eastern European countries) simply incorporating as one man companies or vice versa.

The one VAT rate also generates more tax revenues in that the VAT rate that is often settled on is more than halfway between the present lower and higher VAT rates, with the result that the shift from supplies from the lower to the single VAT rate produces more revenue than the reduction in the higher VAT rate to the new lower standard rate.

Therefore flat tax does work, but its applicabilty and succes very much depends on the country you are dealing with.

The report does consider definitions of a flat tax. But the report, and the article, both predominantly refer to the Hall / Rabushka model of flat tax which is the one most commonly used. That model does not tax worldwide income in excatly the way I describe. So my comments are correct.

And please don't ask me to stop referring to right wing politics, for two reasons. First,flat tax is clearly a part of the far right agenda in the USA and the UK (by far right I maan the sort of right wing idea most Conservatives or Republicans would not go near because it is clearly unacceptable in a democracy) and secondly part of the right wing agenda is to silence opposition. Asking me to stop mentioning the subject is not enough. Please say why I'm wrong and then there is an argument.

But in that respect so far John Sartoris only seems to support my suggestion.

My conclusions on revenues are consistent with those of the IMF and Institute for Fiscal Studies.

What did we all get wrong?

Please explain.

Who was it who said that the first person to mention Hitler in any debate has already lost the argument ? :)

Whilst some of the German people did vote freely for Hitler, and in large numbers after the world economic slump really began to hit Germany hard in 1931, the Nazis never achieved a majority in the Reichstag. Hitler became Chancellor in a coalition cabinet of nationalists and conservatives in which IIRC there were only 2 or 3 other Nazis.

It wasn’t so much democracy that delivered power to Hitler, more a coalition of vested interests who sought to undermine democracy in Germany.

Circumstances in Germany were also so extreme in the period 1930-1933 that any comparisons are not really worth making.

Democracy remains the least worst system of government, and with regard to the current situation in the UK, just because you don’t like the most recent result is no reason to necessarily condemn the system.

Winston Churchill famously said: "Democracy is absurd, but all other systems are worse." It is perhaps the best we have at the moment but different variation of democracy exist (we once had a democracy where women can't vote) and we should strive to continue to improve the system.

I guess 1930s germany was perhaps a bad example as you rightly pointed out. But then we have Hamas there in the west bank - a democratic goverement that leads the country to self destruction.

"And whilst the poor often consume 100% or more of their income, the rich do not (just about by defintion, if you presume accumulated wealth a defintion of being rich). So such taxes are regressive despite"

The present system is regressive anyway and a well planned flat tax can reduce that. In the example in your report, perhaps you could include how much % of his income does a billionair pay in taxation ? Even Warren Buffet moaned that he pays less tax as % of income compared to his salaried secretary !

The current system is very generous to capital gain (which is simply an income in disguise), while a flat tax system will get rid of that.

Remember that today's bloated welfare state is only possible because of hard work by the Victoria, Geograians and the people who came before. In this increasingly competitive world, we shall see how long such inefficiencies can last. In my opinion, this can only led to less prosperity for all (yes, you get lower GINI, and communism achives a close to 0 GINI).

I absoutely agree that we need to be concerned and care for the less fortunate but that is by channelling development and education etc, not by giving them more money in cash (and credit!)

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I also have another proposal that may just suit the taste of certain people here - a flat tax that eliminated poverty (for how long I don't know).

GDP = about £1.1 Trillion
We apply a tax of 80% on all income on corporation and personal income (but tax only once either at corporate level or personal level and personal allowance is not needed), no exemption. This yield about 880 billions.

There are approximatel 33million adults in UK.
Give them £16k each, cost 528billion.

This leaves 352 billion.

On top of my head, current expeniture is about £500bn where social security related takes about 250bn. Under the system, we do not need social security etc, so we have (352 - 500 - 250) 102 bn of budget surplus and have no poverty...hehehehe....

...the examples I gave in my previous posting show is that democracy does not always produce a fair or just result because it is sometimes just mob rule in the interests of the largest mob only.

In some circumstances market or other forces might produce a fairer and more just result than democracy. In which case surely they should prevail?

Tax is a political issue! What nonsense to claim it is not. And I am not a socialist, but am firmly of that opinion.

Of course the way tax is collected is a political issue - it does, or at least should have, a significant impact on the way in which income and wealth are apportioned within socities; those with lower levels of disparity being shown time and again to be the best places to live once (and this is so obvious a point I should not need to add it, but those on the far right who propose flat taxes are such nit-pickers I'd better do so) a reasonable level of income has been reached. That level, incidentally is modest, and is, based on a wide range of academic research, somewhat below UK average income.

For that reason it is quite absurd to argue that this is a simplification debate. In practice flat taxes don't deliver that.

Nor does flat tax theory deliver a world where the rich can't avoid tax as Philip Rosslee says. It actually makes all income from abraod tax free, so if an asset is moved to a place with no source tax then tax is entirely avoided - which is why I call flat tax theory a tax planners idea of heaven.

Finally, John Meadowcroft suggests the claims I make about his views on democracy are incorrectly interpreted. Well, if they are how does he justify putting forward this option as an alternative:

Hans-Hermann Hoppe from the US argues that a benevolent monarchy is preferable to a democracy. This is because a benevolent monarch doesn’t have the incentives and necessary structures a democracy has to take people’s money and pursue protectionist policies.

I'm sorry John - but I don't buy your claim - all I read says you think the power of the market should prevail over democracy. As is your right, you might not call that a right-wing conspiracy, but I do.

...contention is that flat taxes are incompatible with democracy because they are not to the benefit of the majority.

He may be right but he should have qualified his contention because what he really means is that flat taxes are incompatible with unrestrained democracy.

That is even more likely to be true but the point Murphy fails to see is that unrestrained democracy can be as harmful as unrestrained capitalism.

For example, the mass murders and killings of The Terror during the French Revolution were all committed in the name of democracy, the Will of the People and liberte, fraternite, egalite.

It was a particular example of John Stuart Mill's point that the greatest threat to the freedom of the individual is the tyranny of the majority. Unrestrained democracy can become mob rule by the biggest mob.

We have seen lesser examples of the same thing here under New Labour with their continual bans and restrictions on minorities, for example, fox hunting and smoking. Again, all in the name of the Will of the majority of the People.

In the field of taxation the point is made by George Bernard Shaw's observation: "The government that promises to rob Peter to pay Paul can always count on the support of Paul".

So a corrupt and populist government, such as we have now, can exploit the natural greed of the mobs of Pauls for its own ends and to stay in power. This is what New Labour has done in converting taxation into a massive and massively corrupt political slush fund which Gordon Brown uses to buy the votes of the 500,000+ extra civil servants he has added to the payroll since 1997.

It is another example of the harmful effects unrestrained democracy can have.

It may be argued that flat taxes are more just and that they produce more benefits for the general economy. If those contentions are true, the proper conclusion to draw from the fact (if it is a fact) that flat taxes are incompatible with unrestrained democracy, is that democracy may need to be restrained in certain respects in order to produce the better result.

No one is suggesting that democracy should ever be sacrificed completely but, as the examples given above demonstrate, democracy does, on occasion, need to be restrained in order to prevent the harmful effects of mob rule which may result if there are no restraints at all.

Where Murphy goes wrong is to conclude that the (alleged) incompatibility with unrestrained democracy necessarily excludes the flat tax alternative.

It is important to distinguish between the purposes to which the receipts of taxation is put, and the mechanisms and devices by which it is collected. Socialism and envirmonemtalists are the main culprits for blurring this distinction, and unfortunately they have managed to move the debate into an uncomfortable arena. John makes an interesting point, and the comparison with the French Revolution is moot. An increasingly large element are bearing the brunt of the "off with their heads" brigade, on the dubious grounds that they are avoiding paying "their dues".

The debate about flat tax is a simplification debate - but unfortunately Richard has turned it into a politically charged debate.