Alabama introduces complicated hourly tax system

 I've been very intrigued by a newly introduced tax calculation in Alabama.  

A lot of the information I've found about it comes from law firms, who are no doubt explaining it in order to encourage businesses to hire them to make sure that they are compliant. 

How does it work? 

As well as any federal income taxes, Alabama charges income tax at 2% to 5% on a progressive basis. 

Don't rely on my simple explanation here as legal advice, but here goes!  

The new law proposes that workers who are performing more than their contracted hours, which in turn are over 40 hours, will not pay the Alabama income tax on that income. 

So the workers will only pay federal tax on their overtime work. 

They will still pay the Alabama tax on their standard hours, but not on their overtime.  

So their tax rate will still be 5% on some of their earnings (say if they work 39 hours), but then drop to 0% for earnings representing overtime hours.

So for someone who works 45 hours they would have 40 hours of earnings at the standard state-tax-rate and 5 hours of earnings that are state-tax-free.  

Benefits of the system 

The advantage of the system is that workers will face a lower marginal tax rate when offered overtime work than they would do normally. 

This can be achieved without lowering the standard rate of tax (5%) which would of course completely erode the tax revenues. 

I think from Alabama's perspective the aim is a form of tax competition - set up your business here and your workers will be more likely to accept overtime work. 

I expect there is also an expressive element as well - "hard workers shouldn't pay more tax as a result of their striving." 

But in economic terms, the aim as I've noted above could be framed more technically in terms of marginal tax rates. Progressive tax rates discourage high earnings, whether that comes from working more hours or from doing higher-paid work. 

Disadvantages of the system 

It might seem to be a lot of trouble to go through to provide a 5% reduction in marginal tax rates. If the system was applied on federal income tax it would of course be much more impactful, but Alabama can only change its own state tax rules, not those of the US government. 

There will be compliance issues in order to assure that the system is not being abused. Firms will have to do extra reporting, and be expected to apply the new tax rates to their workers (and not just claim and pocket the tax refund themselves). Hence why law firms are offering their assistance. 

Even though employers take on the administrative burden of income tax, the Alabama state tax administration will presumably have extra costs as well. The tax authorities are going to have check the claims by employers to make sure that they are not fraudulent.

The state needs to know a) How many hours workers are contracted to work and b) how many hours they have actually worked. If they have this information they could apply my hourly averaging system (see below).   

Another concern is that this might concentrate work into fewer hands - employers will hire fewer employees and work them longer hours. This seems a strange thing for a state to subsidise. Surely they would want to have more workers employed overall? Presumably the thought is that other firms will set up in Alabama and have their overworked Alabamans provide goods to other states. 

Why not go all the way? 

This Alabaman system is very interesting to me because it is trying in a very crude way to do the thing that my Hourly Averaging system is doing: to tax people who work more hours at a lower rate than those who work fewer hours. 

If the aim is to incentivise work then why not go all the way and impose an hourly average tax calculation? 

The Alabama system does not incentivise part-timers to increase their hours. Or incentivise the early-retired to return to work. 

My proposal is that everyone should have their lifetime income divided by their lifetime hour credits. These hour credits represent the number of hours the person has worked (or been excused from working if they suffer ill-health). This average is used to determine that person's lifetime tax rate, which is in turn used to work out their tax rate on their most recent portion of income. At each point the person will have paid the correct lifetime amount of tax and received the correct  

Such a calculation can be fully progressive - low earners who work long hours at a low wage will have a low tax rate (perhaps even negative with an hourly subsidy). High earners who work short hours  (say a part-time lawyer) would have a higher tax rate. 

Everyone has an incentive to work more, with one difference. 

I proposed a maximum number of hour credits, beyond which point people do not get any further reduction in their tax rate. This is an optional part of the system, but I proposed it for a few reasons:

1. To avoid incentivising overwork 
2. To reduce the potential for fraud
3. To avoid incentivising the concentration of work within each enterprise. A long-hours option for some and few/no work options for others. 

The maximum hours proposal is not key to the system but I think it is a good idea. Alabama are sort of doing the opposite here - Alabama are only applying the hourly tax reduction ABOVE a high threshold. 

Will 2024 be the year Hourly Taxation starts to gain traction? 

I will be watching the Alabama system with interest! 

If a Conservative state can make hourly taxing work then I don't see why my progressive version cannot be seriously considered. 

The potential administrative issues are the big barrier to the implementation of my hourly tax proposal (along with ideological opposition from free marketeers and top-down-statist socialists, and concern about international tax competition).  

Will 2024 will be the year in which hourly taxation finally gets taken seriously? I certainly hope so! 

Philosophers utilising hours

Sometimes I notice political philosophers mentioning things like hourly pay that play a prominent role in my hourly averaging proposal.

I thought it might be useful to list these. Perhaps I should make a similar list regarding economics too.

Rawls and Pogge

Reading Thomas Pogge's Realizing Rawls (1989) prompted this blog. He mentions leisure as a good at several points in the book. I particularly noted the following table, which considers economic systems with different hourly tax rates to illustrate his discussion of Rawls' difference principle.

Pogge here considers how many hours people with different hourly incomes would work if they faced different levels of tax.

Rawls himself discussed leisure-time after being challenged by economists. He then added leisure-time to his index of primary goods. In Justice as Fairness Rawls notes that leisure-time can be added to the index of goods much more readily than native endowments and states of consciousness. He writes (p179) that "leisure-time has a reasonably objective measure and is open to view."

Pogge (1989, p198-9) writes "the index must also include leisure time as a distinct social primary good...Leisure time must play a role in interpersonal comparisons through which the least advantaged within an existing social system are identified. Even though their annual or lifetime income is rather low, those who choose to do only a few hours of well-paid work each week cannot plausibly be considered less advantaged than others who work many more hours per week in a lower-paying job."

Marxist economics

Marx developed a theory of surplus labour value from the pre-existing labour theory of economic value. Time spent working has a key place in this theory, since workers effectively have part of their working time stolen from them each day by their employer.

I'm not convinced by theories of economic value of this kind, and Marx's position isn't really the type of thing I'm interested in here. Nevertheless, I felt it should be mentioned that hours and working time do play some role in this approach as they have historically pushed activists to consider the issue. 

The Distribution of Time 

Other authors have considered how to conceptualise the distribution of time in society. Bob Goodin's Discretionary Time and Julie Rose's Free Time consider whether people have insufficient time available to them; time in which people have autonomy or over which they have freedom.

People's wage rate will influence how much free time they have. Hourly wage rate plays a part in determining someone's dicretionary time (Discretionary Time p43-5) and their free time (Free Time p40). One of Rose's illustrations contrasts people with differing hourly rates, and the difference this creates between them.

The focus of these works is different, but within the realm of work, different hourly wages will make a difference to the time they have available.

Endowment, Talent and Economic Rent

Other authors mention hours worked and hourly income when discussing the ideal form of tax or income.

Socialist philosopher G.A "Gerry" Cohen, for instance, argues that people should be paid the same per hour, unless they have a particularly onerous job. He says as much in Why Not Socialism? (around page 19-20). He writes that "under socialist equality of opportunity income differences obtain when they reflect nothing but different individual preferences, including income/leisure preferences. People differ in their tastes, not only across consumer items, but also between working only a few hours and consuming rather little on the one hand, and working long hours and consuming rather more on the other. Preferences across income and leisure are not in principle different from preferences across apples and oranges." So /leisure/work choices can lead to different levels of consumption even in a socialist utopia.

Stuart White in his book The Civic Minimum (p79-83) considers people's responsibilities to contribute to society in accordance with his "egalitarian earnings subsidy scheme." This determines people's pay with regard to their endowment, but also the number of hours they work. The approach is designed to get around some of the most troubling aspects of endowment taxation, and while it gets around the worst aspects of endowment taxes, it does not get around all of them. While White presents his subsidy as applying for each pound the person earns, my proposal is to apply the subsidy for each hour the person works (if their lifetime average is low).

Kristi Olson's paper "The Endowment Tax Puzzle" advocates a tax on economic rents and uses hourly income to illustrate the various cases she considers. Olsen argues that both endowment taxes and earnings taxes fail to distinguish between income based on economic rents to talent and earnings from other sources.

I believe my hourly averaging scheme gets closest to capturing the rents obtained by high earners, without requiring knowledge of people's endowments and setting of tax-rates accordingly.

Olson writes (p270) "Part of this problem could be alleviated simply by altering the current tax system to take into account not only the individual’s total earnings, but also the individual’s hourly earnings, such that individuals with lower hourly earnings would be taxed at a lower rate." 

Essentially, Hourly Averaging offers a way to put these suggestions into practice as well as can be without taking account of endowment (which could lead to a "slavery of the talented").

Conclusion

I have argued that hourly averaging is attractive from a broad egalitarian perspective, as an attractive hypothetical insurance choice, and that it can be appealing to non-egalitarians too.

Perhaps if the above authors had known of my proposal they could have invoked it as a close approximation of their own ideal.

It is also worth mentioning that the thinkers above mostly do not advocate a Universal Basic Income, but rather argue that income should track, however indirectly, the number of hours someone works.

The difficult case of the Greggs bonus

Another row has developed about the flaws in the Universal Credit system. This time after purveyors of pasties and sausage rolls (vegan or otherwise), Greggs, kindly decided to pay all of its workers a £300 bonus.

Some workers in receipt of Universal Credit would receive as little as £75 of the £300 bonus, an effective tax rate of 75%. Others get a higher proportion of the bonus, but still face a bill higher than the average tax-payer despite being badly enough off to qualify for benefit payments.

Obviously low-paid workers shouldn't be paying taxes at this rate, and the case has generated a lot of media coverage, petitions, and various proposals, including one from David Linden MP not to treat bonus payments as income.

The Universal credit scheme has been beset with problems. It is a good idea in theory to have a joined-up benefit system which gives people an incentive to work, but it is fiendishly difficult to put this ideal into practice.

The problem in the bonus case is that it is a one-off payment. But the Universal Credit system is looking at short term income levels.

My Hourly Averaging proposal aims to do the same thing as the Universal Credit; to make work pay and assist the poorest in society.

Hourly averaging, however, would have no difficulties with the bonus issue. Each person has a tax-rate determined by their lifetime hourly income. A bonus of £300 isn't going to affect that lifetime calculation very much, and so the recipient will receive whatever percentage of the bonus they get for the other work they were doing. Someone whose tax-rate is 0% will receive the whole lot. Someone with a 25% will receive £225 and so on.

Low earners would never face a high tax bill on a small bonus because their lifetime hourly average will be low. There could be exceptions; someone who works in a low-paid job but who received a huge inheritance could conceivably have a high tax-rate, say 70% on their bonus. But that is because they are genuinely fortunate--they have gained much more than their fellow workers, in this case because of their inheritance.

As so often, when there is hand-wringing about the tax-system or benefit system it occurs to me that hourly averaging would do it much better.

Maine tax proposal: Working hours, effort and desert

I was interested to discover that a Republican legislator in Maine has proposed that overtime payments should be exempt from taxation. Its interesting to note why he thinks it would be a good idea and the links to my hourly taxation proposal. Its proponent, Chad Grignon, is quoted on a local radio station:

I submitted this bill on behalf of all working Mainers who put in more than 40 hours a week and deserve to take home more of what they earn. That being said, working overtime should not be viewed as something we wish to see discouraged. In my opinion exempting overtime pay from taxation should reflect the sacrifices that working Mainers make going beyond the 40-hour threshold.

The word that sticks out for me here is deserve, perhaps because I've been teaching about desert theories of economic justice this term. Why is it that people who work longer hours deserve more (and to be taxed less) than those who work fewer hours? The theory that most obviously supports this view is effort desert theory; people who put more effort into their economic activity deserve more than those who put in less.

Effort desert theory, associated with philosophers like Wojciech Sadurski is a very progressive theory, for three reasons:

1. Talents shouldn't make a difference. Some people find it easier to be productive than others. Effort theory says people should be rewarded for their efforts relative to others, not how successful they are.  
2. Gifts shouldn't be allowed. If income should relate to effort put into the economy, then people shouldn't be able to get money without putting in the effort. Those who got their wealth as a gift from their ancestors should then face punitive tax rates.
3. Investment income isn't deserved. People who generate income from investments rather than working aren't deserving--they aren't expending effort. So landlords (except when they are making improvements or providing services) aren't deserving. 

The Maine proposal, however, isn't obviously progressive; it is a reduction in tax for a select group. This would then leave the state with less revenue to assist the poor. However, perhaps this is actually progressive to tax some people less if they are working long hours for it.

Perhaps what this latest proposal picks up on is that there is a group in society that is often ignored by both the left and the right--people who work very long hours for low wages. Because their hard work gives them a reasonable total income they might not qualify for much assistance from the state. Some on the left might not like their materialist attitude as well. The right ignores them because they aren't talented and they generally don't want to give people extra support.

Effort and hours spent working

Time spent is one way to measure effort, particularly when the work you do is directed so workers aren't able to vary how intensely they work; the intensity is fixed by the nature of the work.

My hourly-averaging proposal might be of interest to the Maine legislature as this calculates people's tax-rate according to the number of hours worked. Those who work longer hours to attain the same pay would be taxed at a lower rate. It would apply the principle not just to a limited case of hourly-paid workers who cross a threshold, but on a sliding scale across all workers.

Practical questions 

There are of course practical questions with both my proposal and Rep. Gringon. How do you reliably measure people's hours? Well, his bill points out that employers are required by law to pay the overtime compensation to the employee. So the legal system is already taking account of the number of hours that people work. In this case, presumably, the worker has an incentive to insist on their rights against their employer whereas there is a problem for the Maine proposal and mine in that the employee and employer could collude to overstate the number of hours they work.

Getting around this practical problem is difficult but not impossible. Monitoring employment contracts, pay-rates for different kinds of work, and investigating unusual cases could do a lot of the job. Furthermore, employers are increasingly using technology to monitor workers. If the authorities had access to this information then it would be easy to verify the amount of time people spend working.

Prospects for hourly taxation

This is just the latest example that shows the relevance of time to distributive justice; numerous forms of tax credits being an obvious existing example. Hopefully people will take greater note of this as my hourly averaging proposal is the most thorough application of the principle that people who work longer hours should be taxed less.

Pay gap data and hourly averaging

I've just posted an article on Medium explaining why the recently published tax gap data also acts as a step towards hourly averaging.

Essentially, the data employers require to report on the tax gap is the same as that required for hourly averaging.

Check out the piece here.

Are Robots and AI going to cause mass unemployment?

Futurists, Utopians and Basic Income advocates seem keen to emphasise that we are entering a new economic era that will change everything. This is the age of the robots, where machines and machine intelligence will make most, if not all, human labour redundant.

This sounds great in many ways, but I think we shouldn’t get too far ahead of ourselves, for several reasons.

Will this guy be taking the jobs of table-tennis players?

Firstly this clearly is not in the process of happening at present – the UK has morepeople in employment than ever before (over 32 million – including 75.1% of those 16-65). Productivity is not increasing rapidly, which might imply major technological advances.

Secondly, there are clearly plenty of useful things for humans to do and so we don’t need to entertain this argument until robot slaves really are taking care of all our needs and our (reasonable) desires.

Revolution or gradual evolution?

I don’t doubt that technological chance will continue to alter workplaces and lead some jobs to change radically and even disappear entirely. We see this all the time: docker jobs lost to containerisation, telegrapher jobs lost to radio operators, radio operators lost to digital communication. The Luddites rioted against weaving machines. Change can be fast-paced and while it generally benefits society overall in the long-run by making us all richer, there are sometimes lost skills and in some cases, great hardships for affected individuals and communities.

I can certainly envisage computer technology, driven increasingly by machine learning, taking over more and more tasks currently done by humans. However, I don’t expect that all jobs will be taken overnight, or even for the foreseeable future.

A recent McKinsey report draws the conclusion that only about 5% can be completely automated in the short-to-medium term. Most workplaces will of course be revolutionised if the promised developments really do occur, with jobs changing focus along the way. However, this does not imply there will be mass unemployment.

Put simply, there are plenty of useful things that humans can do. New jobs spring up all the time, often relating to the new-technology. The idea of someone working in “social media” for example would make no sense to someone fifty years ago. More complicated machines also need more expert engineers to create, monitor and maintain them.

Other jobs can also be done by more workers to better effect. Many tasks that are done on a voluntary-only basis at present could become professions. People could spend more time caring for the disabled, for example, including spending time with them rather than taking care of their basic needs. A favourite example of mine is that class sizes in schools and Universities could be reduced by a half or a quarter by doubling or quadrupling the number of teachers.

Resource limits, supply and demand

A further constraint on the computerisation of everything is that machines require power and materials. If machines become more capable and ubiquitous then it may be that the earth’s resources struggle to keep up and the prices of machine inputs increase. On the other hand, if people start losing their jobs then they will look for work elsewhere.

This process will constantly tip the balance back towards employing humans as they get relatively cheaper while machines get more expensive. There may end up being jobs that could be done by machines that humans can do more cheaply, at least when consumer preferences (for example to interact with a human rather than a machine) are considered.

As mentioned above, there seems to be plenty of demand for labour in the UK and plenty of people who would be keen to come to the UK to work. I don't believe this is a UK phenomenon either--other countries with increasing populations seem to find work for their populace to do.

Is hourly averaging redundant?

Some may suggest that my work-based proposal for fairer taxation and benefit calculation are irrelevant because very soon there will be no work to do. I completely disagree that the change will happen so quickly that it would not be worth seriously considering the proposal.

However, to the extent that revolutionary labour-market change is coming, I would argue that my proposals is the best available way to manage this change in a fair manner.

If we see work as a good the availability of which is gradually being reduced then it would need to be rationed out during the period of reduction. This can be done very easily with hourly averaging by slowly reducing the maximum amount of hour credits that can be claimed per week/month. Those who work longer than the maximum will be taxed at a higher rate for those additional hours, which would then give them an incentive to work fewer hours, allowing others to pick up the slack. This shares out the work without banning people from working longer if it still suits them and their employer (though with the advantage that one or both parties will be paying a higher rate of tax or pay for the privilege).

Conclusion

To answer the question at the outset, I don't think Robots and AI going to cause mass unemployment any time soon. Technological advancements will change the labour market, as will changing tastes and environmental depletion.

However, I want to emphasise two things from this. The first is that we don't need a Universal Basic Income on this basis any time soon. Furthermore, instead of being a problem for my hourly averaging proposal, technological developments make it more attractive to manage such changes in a fair manner.

A journal article by yours truly - Arguing for a New Form of Taxation: Lifetime Hourly Averaging

Great news, my paper Arguing for a New Form of Taxation: Lifetime Hourly Averaging is available for viewing online.

I'm very pleased to have this paper published in the Journal of Applied Philosophy.

In the paper I present my lifetime hourly averaging proposal and defend hypothetical insurance as the best method to determine whether resources in society are distributed in a fair manner.

The hypothetical insurance approach is to consider how much redistribution people would support if they did not know if they had a good or bad upbringing, were highly talented or less talented and whether they find themselves in the right place at the right time to earn more money.

I argue that if people put themselves in this hypothetical situation they would find my hourly averaging tax and benefit proposal the most attractive one to transfer resources from the more to the less economically fortunate.

As I've explained elsewhere, you don't have to take a hypothetical insurance approach to support my hourly averaging proposals. However, in this paper I argue that hypothetical insurance is the best approach to take and that if you take this approach then hourly averaging is the tax and benefit system to support.

Working time exactness

My hour credit proposals make use of hour credits, each of which is received when someone spends an hour. I'm sure some people doubt the feasibility of my proposal on the basis that employers wouldn't really control the time that workers to the required level of exactitude.

To challenge that I would usually point to time-card systems and computer-log-in-programmes that are used by many employers. I might also mention that the official leaving time where I work is 17.18.

But Morley College have gone a step further, A recent advert for an administrator there specified that the job is 0.700443 full-time-equivalent. So if a full week there is 38 hours a week then this job is 26.616834 hours per week, or 26 hours 37 minutes and 6 seconds.

Perhaps the time divides more neatly into whatever their specified full-time hours happen to be. However, I thought it was an interesting case, perhaps because of its apparent ridiculousness.

What is wrong with capitalism?

Some people think capitalism is a terrible evil that must be fought and destroyed. At the other extreme there are those who think that laissez-faire capitalism is the perfect economic system. I think both of these views are hugely mistaken but that the question what is wrong with capitalism is still an important one.

Anti-capitalists think that capitalism is wrong in itself for at least one of two reasons. One is that an alternative system would enable people to become more than they can be under capitalism. The second is that these alternatives could avoid terrible things like exploitation or alienation that are inherent to capitalism. At the other extreme some Libertarians (particularly Randian objectivists) think that laissez-faire capitalism produces the right distribution of goods in society and governments that interfere with the market more than necessary are exploiting those who are required to pay taxes or the costs of regulation.

I am not unusual in thinking both of these views are wrong-headed. But it is interesting to consider how you can argue the inherent rightness or wrongness of an economic system. After all an economic system is not an agent that can be held responsible for what it does—it is what is collectively brought into effect and enforced by our society.

Presumably an argument for or against a type of economic system will have to be teleological. An economic system has a particular purpose and if it does not or cannot achieve that purpose then it is wrong. My (uncontroversial) view is that the purpose of an economic system is to provide people with the stuff that they need and want for themselves and those who depend upon them in a way that is fair to all members of society. In follow-up blogs I will consider somealternative purposes for economic systems and some further arguments against markets.

Capitalist systems do a good job of achieving the above ends because:

1.       They provide people with incentives to work and invest in activities that will produce things that others want.

2.       They allow the transmission of information via prices without the need for any direct oversight.

If we are judging economic systems as I propose above then it is impossible to take the extreme pro- and anti- capitalist positions above. There are innumerable variations on capitalist systems and these should all be judged against any reasonable alternative when choosing which economic system (or range of systems) to support. As a liberal political philosopher I obviously think that we need to adopt the best available theory of distributive justice to decide. But what if we just think in terms of economic systems in general?

Given the position I take above, we should not ignore the consequentialist libertarian (think F.A. Hayek or Milton Friedman) arguments for leaving markets to do their work. In one sense the market is a bottom-up one in the way that left-wing anarchists claim of their proposals. However, instead of people voting to come up with a single communal position on everything under capitalism people vote with their money for what will be produced.

However, the libertarian (dis)utopia provides a good warning against following this market logic too far. Capitalism will tend towards inequality and monopoly, something which 19^th century left-wingers thought obvious from observing their societies and which some researchers such as Thomas Piketty and Tony Atkinson have been attempting to prove more recently. Following the money-voting analogy above you have a system of voting where some people are born with the chance to have a lot more votes than others.

There is an overwhelming case for creating a form of capitalism that is regulated to stop people being in a position to take advantage of one another and to ensure that the benefits of the capitalist system are shared among all those in society and not just a fortunate few. Ideally, people would have the opportunity to obtain a reasonably similar amount of money ‘votes’ over what is produced in society and how much of it they get compared with others.

The position I take above is fairly standard, but I wanted to link it to my tax and benefit reform proposals. The aim of my CLIPH-rate tax proposal is to allow capitalism to do its job in the production of goods while interfering with it in the (mal)distribution of goods.

This is done by taxing those who receive large amounts of income or wealth without having to work for it at the highest possible rates and to provide the maximum possible support those who work long hours at low wages, all while maintaining (or replacing) incentives to work that capitalism provides.

The laissez-faire capitalist state is productive because the poor have to work long and hard to avoid destitution while the rich are encouraged to invest and work long and hard by the huge financial incentives offered to them.

My proposal is to link people’s lifetime income to the amount of hours they have been credited for working (or been excused from working). This means that people will all start from a much more equal economic position (since they cannot benefit heavily from gifts early on in their lives but only over time as they gain more hour credits). It also provides a method to bring closer together the incomes of those who do very well and those who do less well in the economy.

Everyone is in the same economic class as all need hour credits in order to gain an income, and there are strong work incentives. Individuals will benefit from earning more money as they do under all capitalistic systems but they also benefit from working longer and gaining more hour credits. The rich and talented cannot hold the rest to ransom by claiming they will withhold their labour or investments if they are not provided with immense riches in return.

While individuals have their prospects drawn closer together the productive system can be perfectly ruthless. Companies will need to be competitive and innovative in order to survive and succeed and those which do not will face bankruptcy or take-over. There is no need to weep for companies which go bankrupt as these are not persons in any moral sense (though we might feel sorry for investors and workers who lose out having been duped by criminal executives).

The idea behind my CLIPH-rate tax and hourly averaging proposals is to take the best of capitalism while mitigating against the worst in capitalism, thereby creating the best available economic system. 

Hourly averaging, the shadow economy and mainstream work

I am pleased to announce my first blog published on the University of Manchester Policy Blog. 

I wrote a piece about the topical issue of tax credits. My argument is that a further advantage of earnings subsidies such as tax credits is that they encourage workers and employers to engage in legitimate activities and expose themselves to scrutiny. This should in turn have positive economic effects. 

I am very much in favour of tax credits. Indeed, my own hourly averaging proposal could be considered as being tax credits on steroids, given that they could be a lot more generous to working people. 

My CLIPH-rate tax proposal goes further than other proposals as it includes all personal income in the tax base. This means that all income is counted in a single tax, which is set up to provide higher net incomes to those who have worked more hours. 

As legitimate work would be a necessary condition for hour credits (and thereby legitimate net income) this would force those engaging in criminal and black market activities to create front businesses to enable those involved to receive any ‘legitimate’ income. Furthermore, as almost all income is taxed if discovered it would be more difficult for people to hide property that they have gained through illegitimate means. 

Having to create front companies would be a costly enterprise that would make criminal activity less remunerative—a tax on crime. More importantly, providing information about these fake front businesses opens up the possibility of scrutiny. Not only would this mean that such enterprises would be more likely to be found out but they would also have linked themselves to all those engaged in the enterprise—all involved would go down with the ship. 

The real problem with UK tax credits

In my previous post I was very critical of the argument that Tax Credits are simply a form of ‘corporate welfare.’

However, I want to flag up one very good point raised by Deborah Orr where this claim is quite probably true. Tax credits utilise a working-hours threshold (of 16, 24 or 30 hours depending on family composition) which will have unwanted effects.

This could be seen as a form of corporate welfare where companies will be able to more easily (and potentially more cheaply) hire two part-time staff to do the job that could be done by one.

This might not be an entirely detrimental outcome—tax credits may have been one of the factors why the downturn in the UK economy as a result of the global financial crisis caused mass underemployment rather than mass unemployment. Employers might otherwise prefer one full-time employee to two part-time employees and there will no doubt be someone out there (possibly one of the part-timers) who would prefer to do the job full-time.

But the hour working threshold will still have unwanted effects. There are no doubt numerous cases where both worker and employer would prefer to have more work hours in a week in the absence of the threshold.

A further problem with the hours threshold for tax credits is that it means that these are not doing as much to assist low-paid workers who work very long hours, for example two minimum wage jobs.

But what is the alternative to the working hours threshold? The logical extension is to take account of the actual amount of hours people have worked and give people more support if they a) work longer and b) work at a low wage.

My hourly averaging proposal does this. It therefore represents a much more effective form of earnings subsidy. It is targeted at those who have a low lifetime average income and gives an incentive for people to keep working full time in order to generate more income. 

Minimum wage and its cost to workers

I have argued in a previous blog that my hourly subsidy proposals should be much more effective at supporting the least economically fortunate than a generous minimum wage.

There are several reasons to prefer targeted earnings subsidies to the minimum wage as a means to increase the living standards of low earners, such as that high minimum wages will price some people out of the job market, make some products and services untenable, benefit low-wage workers from already wealthy families and that it will damage exports from the area and shift the economy to more service work instead.

I wanted to emphasise another important reason that minimum wages can take from the poor while giving to them. According to economic theory (though backed up by a lot of evidence), minimum wage increases will generally be passed on to consumers.

The important question is who will pay the cost of these price increases. If only the goods and services purchased by the economically fortunate increase in price then it is a highly redistributive policy.

On the other hand, if low earners will have to pay a lot more for the goods they buy then the policy simply takes with one hand while giving with another. This is particularly problematic where the minimum wage is having a lot of other impacts on the economy such as increasing involuntary unemployment for the worst off.

The literature on the subject seems to indicate that the latter is true, and that the minimum wage will increase prices substantially for the low workers. Examples are from the USA MaCurdy, 2015 as summarised in the WSJ; Hungary Harasztosi and Lindner, 2015; and the UK Wadsworth, 2010 (also cited in Aitken Dolton and Wadsworth, 2014).

Are there reasons to be sceptical of this argument that earning subsidies might be more effective than the minimum wage at improving the position of the least well off? Perhaps some will worry that the evidence comes from right-wing or mainstream economists. But is there any evidence to the contrary? I would be interested if anyone has any contrary evidence that they can share. 

Tax Freedom day

Every year right-wing ideologues and libertarians declare a particular day ‘tax freedom day.’ I am firmly of the belief that this is nonsense that serves a very pernicious ideological agenda.

Tax freedom day is not a complex thing to calculate. You can simply take the percentage of the economy that goes through the government’s accounts as a percentage of the total economy and apply this percentage to the 365 days of the year.

Of course, it is assumed that people will be unhappy at having ‘worked’ so long and presumably got NOTHING in return. Ignoring of course the fact that people will have gained all sorts from the government spending, and also that those who are very fortunate might be happy to be contributing to their societies and the lives of those who are less fortunate than them. 

People get things in return for their taxes, and some people benefit from government spending more than others. Hopefully those with greater needs will be those who benefit the most. This is the first problem with the idea of a ‘tax freedom day’ – everyone’s tax freedom day would be slightly different from everyone else’s.

The fundamental flaw in the whole concept is that in elevating private earnings and denigrating government spending it ignores the fact that these are both part of a whole system. If the tax system were radically different then the entire economic system and society as a whole would be different—people would be in different positions and make very different decisions.

To illustrate this point think of David Lewis’ possible worlds or science fiction storylines involving parallel universes within the “multiverse.” If the tax system were different this would mean a different economic system. The important question is which of these possible worlds has the most just distribution of the resources of society and how we can move to this scenario.

The important issue is the counterfactual policies that are available to government and which will be better and worse. The proportion of the economy going through the treasury in a given year is of no real relevance; what matters is whether the system is working as well and as fairly as possible for the members of the society.

So the idea of tax freedom day is nonsense. However, I do think that one good thing has come out of this nonsensical “event.” It was my anger at this led me ten years ago to think of a better way of calculating tax than on an annual basis.

It seemed to me that working out an annual average amount was unhelpful and that if you wanted to work it out it should be done on a personalised basis and then compared to the amount that you should be paying given your position in society and your ability to contribute.

Indeed, rather than work it out on the basis of one’s income per year it would be better to work it out on the basis of one’s income for each hour worked. This led me to develop my hourly averaging system which I explain in my book. After all, (most) people are offering their time to the economic system and yet some get a lot more in exchange for this time than others.

In summary, I would suggest treating with suspicion any “think tank” or news outlet which peddles tax freedom day. They show their intention is to impose a particular kind of attitude to taxation and state spending rather than (what would be legitimate concerns regarding) the effectiveness of the tax system or government spending.

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.