A significantly new public policy proposal such as the
CLIPH-rate tax raises a lot of questions about costs and implications. I
therefore think it sensible to answer some questions about this. Indeed, it
would have been good to have provided this as an appendix to the book, and I
would like to do so in any future editions if possible.
As I make clear in Rethinking taxation, there would be a
transition period between the existing system and the CLIPH-rate tax. Raising
funds for the transition could be done through temporary borrowing or a
temporary wealth tax. However, the permanent costs are no doubt more
interesting and important.
It is difficult to do a serious job of calculating the
costs of a major economic policy change such as hourly averaging. The change
would impact prices and choices throughout the entire economy. Some people
would work more while others will work less. People will do different jobs,
companies will change the way they produce. Some things would get cheaper,
others more expensive. Furthermore, there is no prospect of introducing the
CLIPH-rate tax in the short-term and the economy could be quite different
anyway by the time it is introduced.
Nevertheless, it is no doubt useful to some sceptical
readers to indicate how public finances would be allocated differently in a
CLIPH-rate tax world, albeit by making some huge assumptions along the way. Indeed,
there are a lot of options that I leave open for further consideration in
Rethinking Taxation, and the chosen path on these issues will impact upon
public spending—such as whether to bring government pension payments into the
system or not.
When considering tax and benefit policy changes it is
common to assume that total revenue and/or spending will remain the same. This
makes sense as fixing one element makes it easier to see the real impact of the
policy, though it is obviously quite artificial.
I will use the UK budget as a starting point, as it is
the system I know the best as a UK citizen. In some cases it does not really
matter that much which government agency undertakes a particular activity, as
long as it is undertaken. So, for example, tax fraud detection could be
undertaken by the police, the tax authority, or a specialist department. No
doubt it will make sense for the tax authority to perform this, but given that
tax evasion may go with other forms of crime close working with other
crime-related departments will make a lot of sense.
The CLIPH-rate tax will take over from many existing
taxes and spending areas and so this would need to be taken into account.
Hourly averaging would, I assume, replace Income Tax and National Insurance. It
would also take over Tax Credits, the Universal Credit, disability / incapacity
benefits, unemployment benefits and Josbeekers Allowance. It could also take
over pension payments, though I will ignore this possibility here and assume
public pensions remain the same.
Tax revenue changes
How would the composition of tax revenues change? The
CLIPH-rate tax would combine income taxes, taxes on investment income and
capital gains taxes. If revenues were sufficient it could allow the removal of
consumption taxes (sales taxes and Value Added Tax) and corporation taxes. I
will assume that these would be maintained to the extent that it would be
necessary to keep revenues the same.
The CLIPH-rate tax would of course bring some major
changes. Tax revenues from low earners would drop substantially, and I will
assume in this model that greater revenues from above-average earners and
recipients of substantial gifts and inheritances would largely make up for
this.
As the CLIPH-rate tax is a lifetime tax the revenue might
not be as consistent as the current system. In the short-medium term there
would be a large rise in revenues from gifts and inheritances. I suggest these
should be invested in a sovereign wealth fund as they will be required in the
long term as the benefactors gradually receive enhanced net incomes as they
obtain more hour credits. The SWF would be used to ensure that government
revenues are consistent.
The SWF will of course receive returns from its investments,
which is a further gain within the CLIPH-rate tax system, though one I will
ignore here.
Public spending with neutral revenue
I think it would be reasonable to assume that the
CLIPH-rate tax could raise more public revenue than rival tax systems without
damaging economic development. This is because many people would be working
more hours, increasing the size of the economy and reducing the cost of many
items. If people were spending less on what they would purchase anyway, they
will have more money to save or spend elsewhere. This in turn will increase the
size of the economy.
Nevertheless, I will assume here that public spending
will be roughly neutral. So the question is how to re-allocate a fixed budget for
the UK of roughly £731 billion (Sources for rough and rounded figures are the National
Audit Office, gov.uk
and UK Public
Spending). I will now outline the major changes in how revenues would be
spent.
What government functions will cost more under the
CLIPH-rate tax? The administrative costs would no doubt be higher, as the tax
authority would require more information, and greater efforts would need to go
into tax and hour credit fraud detection.
However, these fraud-detecting efforts would bring
savings elsewhere. Making criminal activity more difficult would have numerous
benefits, such as reduced security and insurance costs, and perhaps a reduction
in the harms caused by criminal enterprises. The corresponding benefits could
be substantial and impossible to quantify. One clear consequence for the public
finances would be a reduction in compliance and fraud detection costs that are
currently borne by other agencies (mostly the police).
In the above example the tax authority would take on work
currently being done by other departments. There are other roles that could
simply be transferred in the same way. The CLIPH-rate tax would combine several
existing systems into one. (This is happening to a degree with the Universal
Credit in the UK, though the CLIPH-rate tax would do so in a more comprehensive
manner that would not suffer from the same difficulties).
I will now consider groups of people would receive
greater income through the tax system than they do currently and whether this
would be covered by directly re-allocating existing spending from elsewhere or
whether it would require additional spending.
I would propose that carers receive payment via the hour
credit system and this would be an additional expense. It is difficult to
anticipate the costs without undertaking some serious analysis. Some of this
could be found from existing care expenditure, which mostly undertaken on a
local level by social services. Furthermore, hour credits for those looking
after children would replace the existing child allowances and child tax
credits. I should think that the credits for caring for children would be
roughly cost neutral, while the credits for caring for the elderly and disabled
would be more costly.
I also propose that students should receive hour credits,
which would replace the student loan system. I assume that students would pay
fees, particularly if they qualify for valuable hour credits in exchange for
their studies. As students would get income from hour credits they would need
smaller student loans if these were even required at all. As the hour credit
payments would effectively subsidise the higher education sector there may be
scope to transfer some Higher Education spending along with spending on student
loans into the hourly averaging system.
Another proposal I make is for a guaranteed
job scheme. Administering such a scheme would be another expense, and this
would replace the existing jobseekers provisions. The unemployed would qualify
for more generous support if they partake in the scheme, which would cost more.
On the other hand, we can expect unemployment to drop substantially for two
reasons: 1) there would be a much lower minimum wage so employers with work
that could be done could offer jobs much more readily than they do, and 2) The
existence of the work programme would mean that leisure-advantages of being
unemployed would disappear. What this does mean is that the costs will be
displaced, as I will now discuss.
The vast majority of additional spending for the
CLIPH-rate tax would come from the earning subsidies that it provides to people
who work a lot of hours at a low rate. This replaces the existing tax credits,
but I would expect hourly averaging to be more generous. If wages were allowed to drop below the
previous minimum amount (and then did so) then this would also increase the
cost of subsidising earnings.
There are around 1.5 million people working in jobs at
the minimum wage or a little above. Some of these jobs would pay more in a
world with hourly averaging world while some would pay less. Many of those in
minimum wage work will receive tax credits as things stand, and tax credits
would be calculated quite differently. People would have a strong incentive to
work longer hours, whereas existing tax credits can give people an incentive to
work part-time.
It is much harder to guess the amount of spending
required to cover the additional negative hourly tax payments. Some people who
would receive benefits in the existing system may not qualify for subsidies due
to their higher income in previous years (for example from gifts or
inheritances or past high-paid work). However, many will be entitled to more.
The subsidy rates would need to be set in such a way that the amount of
additional spending would not vastly exceed current spending on tax credits.
Nevertheless, I would expect that the spending would be greater than that on
tax credits.
The additional expenses that are not immediately
accounted for by switching expenditure for the same purpose from one department
to another is therefore the increased administrative and anti-fraud costs, the
additional spending to support carers, and the extra funding for hourly
subsidies for those who work long hours at low wages. The latter cost would be
largest.
Where would this come from? The easiest answer for me is
to claim that the greater economic activity engendered by hourly averaging
would mean that the economy would be very successful and everything including
the public finances would improve. However, let us assume that economic
activity remains at broadly the same level.
The choice of what other forms of expenditure to cut
would be a very political one. Personally, I would suggest reducing tax
preferential treatment of savings, pensions and charitable deductions to raise
additional revenue. This would not save enough and so a large amount of the
difference would need to come from reducing other forms of subsidy from the
welfare budget. Housing benefit is an obvious choice as we could hope that the
reduction in inequality and greater spending power for the low-waged would remove
the need for such large housing subsidies.
In other states where there are no items like housing
benefit that would be less important with the application of hourly averaging, the
additional funds may have to be found from other sources. Alternatively, the
existing public spending could be maintained and the additional funds covered
by greater economic activity or because the CLIPH-rate tax is able to raise
more tax revenue than the taxes it replaces.
The above discussion is very broad and vague, but I am
afraid a highly detailed breakdown of public revenue and spending would be
rather pointless. The CLIPH-rate tax is not going to be introduced in the short-term
and the economy will be different in the future making current spending figures
outdated. Similarly, introducing the CLIPH-rate tax would cause significant
changes to the economy as well. This makes current revenue and spending levels
would need to be revised. Nevertheless, I have now given some idea of the
shifts in public finances that would accompany my proposals.
