Keen and Slemrod Tax Wisdom and my tax proposals

If anyone is doubtful that taxation is an interesting and important topic, I suggest they read the recent book Rebellion, Rascals, and Revenue: Tax Follies and Wisdom Through the Ages by Michael Keen and Joel Slemrod. 

The authors are experienced tax experts, but they explain public finance not through dry mathematical equations but through interesting anecdotes and stories. They present numerous unusual taxes and charges that have been applied over the centuries. For instance, a bridge that people without shoes could cross for free while the shoed (shod?) would pay toll. 

The book covers all the important topics to do with taxation and alternative forms of government funding. It even contains a lot of puns in the section title headings, and I wonder if there were some that I didn't get. 

For those interested in finding out more, perhaps while waiting to get hold of your copy of the book, the authors spoke about some of their favourite examples from the book in a video: 

Tax Wisdom

One feature of the book is that towards the end they review some of what they have taken-away from their years of study and engagement with tax systems throughout the world. They end with their thoughts about where tax might be heading in the future. 

I was pleased (relieved) to see that several of their recommendations and predictions included several things that I have attempted to do with my own tax reform proposal, which I have called the CLIPH-Rate tax, set out in my book Rethinking Taxation. 

I thought I would flag up a few of them here: 

New technology

Keen and Slemrod highlight that the use of big-data could be game changing in uncovering tax avoidance and evasion. I agree. 

This, plus greater integration between taxation and the financial payments system, should create a lot of opportunities to do things differently. João Félix Pinto Nogueira has recently argued that there could be a different model of taxation in the future, and I think this is right.

I believe that the use of real-time calculation (as is now applied in the UK) allows a different way of doing tax. And it needn't just be applied to payments from employers. (In the UK this income tax withholding is called real-time PAYE, but there are similar systems with different names in other countries.) 

All financial transfers could be taxed in real-time based on the recipient's current tax-rate. By current I really do mean current - the tax authority could update their tax rate and inform the financial institution to withhold the correct amount on all transactions. 

Integrating real-time tax calculations into all payments means that there would no longer be any need for payments between taxpayers and the tax authority. Any corrections could be applied at the next payment to that individual. 

Of course, this could include "negative tax" payments to increase someone's payment if they have paid too much tax in the past or if they receive additional support from the government, for instance because they have a very low income or require some extra support due to their personal circumstances (disability for instance).  

Integrate the tax and earnings subsidy systems

This leads onto the next suggestion. Running a real-time system with negative tax rates for low-earners, means that the tax system can be integrated with the benefit system, and used to make payments to recipients. 

A potential problem with this is that support systems tend to need to react swiftly in order to ensure that people in difficulty (for instance who have lost their income) can survive. 

However, I think that using technology and providing a Guaranteed Work Programme (which I think should be offered alongside my proposal), it should be possible to ensure that everyone has continued access to an income. Some special benefits could continue separately, while others would be rolled into my proposed single-tax system, and payments could be triggered regularly if needed. 

Extend the tax period beyond a year 

Keen and Slemrod highlight that 365 days is a rather arbitrary amount of time for taxation calculations. Given that it is the time it takes for the Earth to go around the sun, reflects agricultural seasons, and is  the basis of calendars, 365 days is more sensible than a 250 or 450 day tax year. 

Nevertheless, any given year may not be reflective of the taxpayer's overall situation. As Vickrey and others noted long ago, a longer period would be more appropriate. Indeed, where the tax system is progressive, as I believe it should be, this becomes all the more important. Large payments would then be averaged over many years, rather than included within a single tax year. 

I have therefore proposed, a little like Vickrey, that we should apply a lifetime average tax calculation. This has many advantages, but requires a different way of calculating taxes. 

This allows more progressive tax rates, because these rates would be applied across many years of life. As well as being fairer to those who have fluctuating incomes, and more accurate, this means that people would have no incentive to artificially arrange their payments to occur on one date rather than another in order to fall into a particular "tax year." 

Tax economic rents very highly

One worry about taxation is that it will discourage productive behaviour, but this is the case for some taxes more than others. 

Economic rents occur where the owner of something (their land, spare money, their skills/talents or whatever) gets a higher return from employing it than they would require in order to put it to that use. 

Taxes on economic rents are an ideal tax in this regard because they do not impact on economic behaviour. A landlord will rent out their premise to the highest bidder, whether they get 100% of that amount or 50%. Perhaps at a certain point they would decide it is not worthwhile to rent out their premise and leave it unoccupied, but that would mean that they wouldn't be getting any return on their ownership.    

They are also an ideal tax because they tend to be progressive - it is almost by definition the economically fortunate who have the opportunity to generate economic rents. The less fortunate don't have anything on which to generate rents. 

In practice, it is hard to know what rents are ex ante (before the fact). So a pure rent tax is something that exists in theory and not in practice.

However, I believe that my Hourly Lifetime Averaging system would achieve tax rents well by proxy. This is because:

• It taxes all income, earned and unearned in a very progressive way 
• It reduces the tax rate for those who provide their time into the economy through working (or get some credit for not being able to do so)

Tax leisure 

To put it differently, the system I propose taxes leisure. 

This relates to another piece of tax wisdom in the book. Actually, in the book the suggestion is to tax complements to leisure. Taxing the things that people would like to do if they weren't working would make working relatively more appealing. 

I go one step further and just tax the leisure directly. As I note above, the hourly averaging system rewards people who work more hours with a lower tax rate (at least up to a maximum point). 

So someone who has received a lot of income without doing much work (a wealthy heir for instance), would face a very high tax rate (at least until they have worked a lot of hours). Meanwhile, someone who works for a low wage would have a low--possibly negative--tax rate. 

Both have an incentive to work, and the heir can be taxed at much higher rate than under any other system, and the low-paid worker will be able to get a more generous income supplement that won't be as harmful to the economy.  

If someone retires earlier, or works part-time rather than full-time, they would face a higher tax rate on their unearned income. There is nothing wrong with working less, of course. There is more to life than working. However, the wealthy and talented can afford to work less while the poor cannot. Hourly averaging would incentivise everyone to work longer. 

It also retains the incentive to work in higher productivity ways too, since people will always benefit from having a higher income as well. It takes account of hours at work and income, rather than simply income alone. 

Final Thoughts

I don't know what Keen and Slemrod would make of the CLIPH-rate tax. I can imagine they would consider it too idealistic to introduce such a major change, since piecemeal reforms are always easier. They might also argue that it would be hard to administer (they have two chapters on tax gathering and the difficulties in collecting accurate information from people who benefit from hiding this). 

However, it was reassuring from my perspective that the conclusions of the book pointed in the same direction as the proposals that I made a few years ago. :-)