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. 

Hourly averaging and taxing the most fortunate

In my recent blogs I have explained why hourly averaging is a very useful method to assist the least fortunate: it provides an earning subsidy that contains a strong incentive for people to work more hours.

Perhaps I have assumed that it is obvious why hourly averaging offers an excellent method to tax the most fortunate at appropriately high rates. Put simply, a lifetime hourly average is the best feasible and measurable gauge of each person’s economic fortune. To show why I will describe eight people, who fit into some fairly simplified but important categories.

Some of the imaginary persons find it easy to do well in the job market. They might earn more because of their natural talents, their connections, or simple good luck. Others, however, are unable to earn high wages because they have not benefited from such good luck. Another dimension of luck is that of family background, people can either come from a rich family which offers them support or a poor family which is unable to assist them in ways that will generate more income and wealth.

All of these people freely choose (with no mitigating factors) to work full or part-time. If we look at some index of their income and wealth against which to tax them we would classify people as follows:

Person	Low or High wage?	Part-time worker or full-time	Rich/Poor family	Income/wealth
Adrianne	L	PT	Poor	Very Low
Brenda	L	FT	Poor	Low
Celine	H	PT	Poor	Low
Daphne	H	FT	Poor	Fairly High
Edith	L	PT	Rich	Middling
Fran	L	FT	Rich	Fairly High
Gina	H	PT	Rich	Fairly High
Hannah	H	FT	Rich	Very high

Table 1 : Fortune and work choice of 8 people

People’s income/wealth generally goes up as we move down the table and those at the bottom of the table are also more fortunate. A progressive tax system (which could capture returns to fortune from family transfers, investment income and earned income) would therefore tax Hannah more than Adrianne, which is the right sort of outcome.

However, taxing income and wealth does not capture the difference between all of the individuals. If we place people on a numeric scale for both their income/wealth rating and the areas in which they have good fortune we can see that in most cases there is a difference (see table 2). This difference tracks their decision to work full or part-time. There is nothing wrong with people making this choice of course. However, the choice does not indicate how economically fortunate they are – they just want to work fewer hours (for example because they want to spend more time on their hobbies).

One way to put the problem is that income and wealth can vary due to numerous factors including the choices that people make. Some of these factors will be examples of fortune, but income and wealth are influenced by other factors as well. The important factor here is the amount of time they work, though another factor could be their tendency to spend or save. This would also influence their level of wealth and investment income, and is reason to be cautious about taxing wealth, as I discussed in a previous blog.

Person	Income/wealth	Fortune in family or job	Difference between the two?
Adrianne	Very Low	Low	Y
Brenda	Low	Low	N
Celine	Low	Middling	Y
Daphne	Fairly High	Middling	Y
Edith	Middling	Middling	N
Fran	Fairly High	Middling	Y
Gina	Fairly High	High	Y
Hannah	Very high	High	N

Table 2 : Problem with tracking fortune on the basis of income and wealth

For progressive taxation on income that tracks fortune, there is a problem. Some full-time workers are taxed at higher rates than their fortune-level would appear to warrant (Fran, Brenda and Daphne) while the part-time workers are taxed at lower rates than their relative fortune level (Celine and Gina). If taxes were made less progressive then less tax revenue would be generated overall, leaving less revenue to assist people like Adrianne and Brenda.

The dilemma continues as well because while higher tax-rates might generate more revenues, they might encourage quite a lot of people to reduce their hours. It might encourage the Daphnes of this world to become like Celines, Frans to be like Ediths and Hannahs to be like Ginas. If people reduce their hours then everyone suffers as a) there are less goods and services available and those that remain will probably be more expensive (prices will rise) and b) there will be smaller tax revenues available to assist the less economically fortunate (particularly when we remember that tax revenues are required for important issues such as administering law, policing, democratic institutions, development, and for providing education, healthcare, support for the disabled and national defence).

Calculating taxation using a lifetime hourly average income enables us to much better tax people in accordance with their economic fortune. As table 3 shows, lifetime hourly average will coincide much better with good fortune.

Person	Income/wealth	Fortune in family or job	Difference between the two?	Lifetime Hourly Average Income
Adrianne	Very Low	Low	Y	Very Low
Brenda	Low	Low	N	Very Low
Celine	Low	Middling	Y	Middling
Daphne	Fairly High	Middling	Y	Low
Edith	Middling	Middling	N	High
Fran	Fairly High	Middling	Y	Middling
Gina	Fairly High	High	Y	Extremely High
Hannah	Very high	High	N	Very High

Table 3 : Lifetime Hourly Average for the eight people

Indeed, lifetime hourly averaging is potentially quite nuanced, and this points to the other major advantage of the system. Taxing people on an hourly basis means that the tax system gives people a strong incentive to work full-time rather than part-time. Adrianne will have a strong tax incentive to work longer like Brenda, Celine like Daphne, Edith like Fran and Gina to do like Hannah. It therefore has the opposite effect to all other tax proposals—instead of reducing the incentive to work this tax system would decrease it. This means that the economy will provide more goods and services (and therefore cheaper prices for these) than we would expect for any other highly progressive tax system.

We want to tax the most economically fortunate without discouraging economically productive activity and lifetime hourly averaging offers the best available means to do so.