Sunday, 26 April 2015

Technology and tax calculations

A lot of suggestions to change tax calculations are intended to make it “simpler,” by which is meant to reduce the number of tax bands. Indeed some people even want there to be just one band – flat taxers. This is a terrible idea for lots of reasons, but the advantage of “simplifying” tax rates is in fact disappearing as time goes on.

It really is a bizarre idea to want to restrict the choice of tax rate to one option rather than utilise many. Arbitrarily limiting the tax calculation in this way leaves very difficult choices and makes it very difficult to achieve all that you want with the tax system. If you want to raise a lot of revenue you have to impose significant taxes on middle earners in order to get revenue from high earners.

Progressive and effective taxation is very difficult to achieve with the flat tax, which is often what the supporters of the single rate restriction really want to achieve. This would be a different argument about justice and the tax system, which I have discussed elsewhere.

The only sensible complaint against more complex rate structures is that people will not know what the tax implications will be for the economic choices that they are considering. If this complexity leads people to make the wrong decisions for them then it would adversely affect them, and in many cases for the rest of society as well.

The increasing availability and power of technology really makes this argument for simplifying tax rates disappear almost entirely. The computer in everyone’s mobile can perform the ‘complex’ calculations of tax implications in nanoseconds.

In a previous blog I mentioned that people should in the near future be able to log into an account with the tax authority and access data on their tax account. They could also integrate this with other programmes, but it would be useful if the tax authority could provide a service. This could predict future taxes based on scenarios entered by the taxpayer.

Tax calculations can be as complex and clever as we want them to be, and people will still be able to find out whatever they need to know about what their future liabilities. People can use their personalised tax website to work out their likely future tax rate and therefore net income.

For this reason the ostensibly more complicated tax calculations I propose in Rethinking Taxation—which utilise a smooth curve rather than discrete bands—are perfectly viable and fair. You can apply real-time lifetime averaging calculations without too much difficulty. I also suggest combining numerous tax bases into one comprehensive tax base and to calculate tax on that—people can plug in their expected income from all these sources and find out their future net income.

Indeed, there are reasons to think that people would find it easy to guesstimate their future liability with my lifetime proposal; people’s tax rates should quickly stabilise and people would come to know roughly what percentage of their future gross income they will receive net.

In conclusion, there is no need to worry about the complexity of tax rates in the digital age. This destroys the only argument for flat taxes or reducing the number of bands. Our technology also opens up the possibility of much more complex methods of tax calculation such as my own hourly averaging proposal. This means we can in fact have it all: highly progressive tax calculations that encourage economic activity. 


Physiocrat said...

It is not as simple as you claim to have multiple bands. If your income is near the threshold it becomes important to give an accurate return. If you have incomes from different sources, and some of them are through self-employment, dividends and various odds and ends, collecting the information and ensuring it is accurate is troublesome. I assume you have only ever been on PAYE. Wait till you start to receive royalties and have to deduct your costs, and in some cases apportion your costs between your business and private expenses which you should not be claiming as business costs. Then you will pick up a big bill from the accountant you will probably need to employ to sort out all your receipts and invoices.

When you find yourself in that situation you will change your views dramatically.

Mr Miliband said...

Great blog. I'm not sure technology is the answer though. I'd advocate a basic income for all (which will help with the flexibile labour market) combined with a high rate of basic tax. The net tax contribution would then be progressive (negative for those who earn very little). Looking forward to reading the book.

dougbamford said...

Thanks for the comment Henry, and for making a point I decided not to make in the end: The current tax system isn't that simple anyway.

While bands have the advantage that people (excepting the complications of the type you point out) know their marginal tax rate...that is what I have been discussing in this blog.

But with bands the marginal tax isn't someone's actual overall tax rate.

Regarding technology, I think it can make the process easier for some and save them the need to hire an accountant etc. I don't claim that technology makes everything easy, but rather that it means you can consider new options, such as my proposals.

dougbamford said...

Mr Miliband - thanks for commenting despite no doubt being busy!

I've blogged about basic income at (I also discuss it a little in my thesis and book as well.) My worry about it is that you are subsidizing people who don't really need help and that leaves fewer resources for others.

Basically I'd rather top up the income of someone working full time for low wages than someone who chooses to work very little.

Firstly because the person working long hours for low pay is more likely (though admittedly not necessarily) going to among the less economically fortunate and second because this will give people an incentive to work more while basic income gives people an incentive to work less. This means that there will be less economic production and goods and services will probably cost more as a result.

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