Saturday 31 January 2015

Cumulative Advantages of the CLIPH-rate tax

My CLIPH-rate tax proposals represent a major change in the administration of taxation and benefits. It requires the authorities to obtain information about the number of hours people are working, or to assign hours to those who have a valid claim for additional credits. I admit this is no mean feat.

So why is it worth investigating the advantages of such a difficult undertaking? One point to make is that there are multiple advantages to the scheme and if you add these together then cumulatively, the proposal becomes attractive.

In previous blogs I have highlighted why hourly averaging should be good at taxing the rich, helping the poor (by which I mean low-earners), and do so in a way that would encourage economic activity and growth. However, will these advantages really outweigh the costs of administering the system?

I would like to suggest one reason why they might, under the heading of cumulative advantages.

This is just a way of saying that hourly averaging achieves many things using one system. This system would replace many other taxes and benefit payments and roll them into one single system. The CLIPH-rate tax would subsume all forms of income tax and if revenues allowed it could enable the removal of VAT/Sales and corporation tax. It also counts capital gains and gifts and inheritances and so these would fall under its remit.

More importantly hourly averaging would replace a lot of benefits that currently exist. It would replace disability benefits, unemployment benefits (jobseekers allowance), child benefit and tax credits/earning subsidies. Assistance for carers and students are included in the single system as well. Furthermore, if people’s incomes are closer together there is much less justification for other benefits (such as housing benefit in the UK).

Rolling together many taxes and benefits into one system should make the overall system a) easier to administer for governments and civil service, and b) easier for people to understand and engage with. Furthermore, one major system is much less liable to tinkering and political point-scoring when compared to the possibilities opened up by many systems that the public do not necessarily understand very well.

I have emphasised that is good at taxing the most economically fortunate and assisting the least economically fortunate, but one concern is that it will also require the assessment of many people who seem to be in the middle. This leads to the worry that a lot of time and effort will be expended on people who are neither highly fortunate nor unfortunate.

In response to this worry, I would argue that the information that hourly averaging provides might show us that many of those who are considered to be ‘in the middle’ are actually either quite fortunate and should be taxed more (or encouraged to work more) or that they are not as fortunate as they appear and should really receive extra assistance.

With the full information about the amount of earned income people have received in their lifetime compared to their unearned income and to the amount of hours they have worked in order to obtain this earned income, we can make much better judgments about economic fortune.  We can then tax and redistribute in a much more appropriate manner.

A lot of time, resources and effort are expended on the current system. This contains lots of components which are administered separately and do not always work very well together. I see no problem in expending a little bit more of these if it would achieve much better results. 


dougbamford said...

Alternative title: "Three for the price of one!"

Physiocrat said...

But why should earned incomes be taxed at all? What is the principle?

If you take tax incidence into account, you should realise that taxes on wages are functionally equivalent to a payroll tax ie a tax on net wages. It would make no difference if workers were paid net wages and the employers paid tax on the total net wage bill. If you want simplicity, surely that is the way to go, however, any tax which adds to employment costs sounds like a bad idea.

dougbamford said...

Hi Henry, you have posted pretty much this comment before and my answer is still the same: the system is designed to tax unearned income at a very high rate relative to the tax on earned income.

I accept that my proposal would increase employment costs for some jobs that are 1) very highly paid per hour and 2) unpopular. So maybe people might have to pay more for people to do accountancy, ice trucking and deep sea diving. But the costs would be spread out among a large number of consumers so each would not have to pay too much more. Can you think of any more jobs in this category?

After all the complaint that high earners make is that they will 'go elsewhere' if they are taxed, not that they will become cleaners instead.

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