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.