What are potential hour credits?

Hour credits are highly valuable in an hourly averaging economy. Their distribution would need to be tightly controlled and the rules for entitlement to them would need to be strictly applied. The binary nature of hour credits could be seen as a source of great inflexibility in the system. In some cases the choice to give out hour credits for certain activities could be a very difficult one. Disallowing hour credits for an activity might stifle a highly useful and important part of the economy or society. Allowing them, on the other hand, may have serious consequences.

Consider the example of hour credits for writers. If writers are not able to claim hour credits this would reduce writing to a hobby activity, one which would need to be funded largely by people working on other activities. Great writers might have to waste valuable writing time doing approved work and society would miss out on many if not all of their latent works. Now consider the other extreme, where writers are given hour credits for spending time writing. If anyone is able to declare that they are writing something then many more people would than the number who would be considered serious writers. Free-riders could occasionally hand in a load of nonsense to justify the valuable hour credits (and the money that follows) they receive from society. Plus we wouldn’t want government approved censors making the call about which works were artistically valuable. The two extremes are undesirable.

My proposal is that people should be able to register ‘potential hour credits’ for some activities, for example that of unfunded writing explained above. These potential hour credits would not generate any tax or income benefits when they are granted. If the activities later generate income then the authorities can upgrade these potential hour credits into fully fledged ones. This could be applied at a rate of converting one hour credit for an amount earned above the zero-tax point. So if this amount is set at twice the zero-tax point and this point is £9 per hour then the potential hour credit upgrade rate would be one hour credit for every £18 earned from the activity. Once the income from the activity exceeds the number of potential hour credits there are no more to convert. Of course the taxpayer can continue to receive further income but this will have no further effect on hour credits.

A further suggestion (from my very clever fiancée Katy) is that the upgrade of potential hour credits could be accompanied by a tax-free top up payment as well. This would represent the difference in the value of an hour credit of the required value being received at the time the potential hour credit was granted and the time at which the potential hour credit was upgraded. Katy suggested using the ‘social time and preference rate.’ For the most part the payment would be very small. However, where the rate is high or the time-span is long the payment could be valuable to the recipient.

This briefly explains potential hour credits. Let me know in the comments if anything is left unclear. In the following posts I will explain the sorts of activities that would qualify, and also present another possible use for potential hour credits for self-employed workers. 

Missing from Rethinking Taxation: Potential Hour Credits

In my previous blog I mentioned some of the references that came too late to add to my book, Rethinking Taxation. However, there was another aspect of my hourly averaging proposal that I decided not to mention at all in order to save space and thereby keep the cost of the book down.

The proposal is for an additional method of receiving hour credits. As well as granting hour credits the authorities could have the power to grant potential hour credits, which could later be upgraded to full hour credits.

Potential hour credits add greater flexibility into the hourly averaging system. They can help to make the system fairer, more encouraging of innovation, and reduce the scope for fraud. This anticipates some of the concerns that critics might have about hourly averaging.

In the following blogs I will say more about:

1.       How potential hour credits work.

2.       Potential hour credits for works of art and inventions.

3.       Potential hour credits and start-up businesses.

4.       The way that potential hour credits can be used as part of the provision of hour credits to the self-employed. 

Missing references from Rethinking Taxation

My previous blog contained a list of references for my forthcoming book, Rethinking Taxation: An introduction to hourly averaging.

In common with works of art, you have to draw a line under a book at some point in time even though there are small things you might like to add. To be fair to the publisher, and to ensure that the book can come out sooner rather than later, I thought I could save the following additions for any future additions rather than delay any further. After all, additions would change all the pages and make it necessary to change the index etc..

Furthermore, nowadays it is easy enough to write a blog such as this one adding the latest information.

The first reference I would have liked to add would be to Thomas Piketty’s recent bestselling book ‘Capital in the 21st Century.’ Piketty had added further evidence to the argument that capitalism without redistributive taxation will always tend to generate widening inequality between capital-owners and workers. I pretty much assumed this to be the case throughout, since commonsensically those who have money behind them can invest, purchase things without the need to make debt repayments, and have the opportunity to earn as much as the poor from work while they obtain returns on capital.

The argument in the book does not depend on there being this tendency within capitalism, as there would be reasons to redistribute from free-market outcomes even if a higher proportion of less economically fortunate people who could catch up with the rich without redistribution. However, perhaps the point given greater validity by Piketty makes the case for redistribution even more urgent. This is because free-market economies will simply create an increasing division between “haves” and “have-nots” no matter what any individual does.

The other references I would particularly like to have added are to my own recent and future publications. I would add the following journal paper to footnote 109 on my approach to international taxation:

Bamford, Douglas. 'Realising International Justice: To Constrain or to Counter-Incentivise?', Moral Philosophy and Politics, 1/1 (2014), 127–46.

I would add the following journal article to footnote 4 on Dworkin's hypothetical insurance approach:

Bamford, Douglas. 'The Holistic and Policy Focused Interpretation of Hypothetical Insurance', Moral Philosophy and Politics, (forthcoming).

I also hope to have further publications confirmed in the near future which will develop some of the points I make in the book in greater detail. I hope to add these to this list as and when the titles and publication details etc. are confirmed.

I am sure many future publications will be relevant to the book, but I thought these ones were particularly noteworthy as I was considering adding them when doing the final proof. They were so close to inclusion!

References for Rethinking Taxation: an introduction to hourly averaging by Douglas Bamford

Including references in the book would have increased the size and therefore cost of it. I therefore promised to put these on my blog and here they are.

Ackerman, Bruce A. and Alstott, Anne, The stakeholder society (New Haven, Conn.: Yale University Press, 1999).

Allingham, Michael G. and Sandmo, Agnar, 'Income tax evasion: a theoretical analysis', Journal of Public Economics, 1/3–4 (1972), 323-38.

Andrews, William D., 'The Accessions Tax Proposal', Tax Law Review, 22 (1966), 589-634.

---, 'A Consumption-Type or Cash Flow Personal Income Tax', Harvard Law Review, 87/6 (1974), 1113-88.

Bamford, Douglas, 'Comprehensive lifetime taxation of international citizens: A solution to tax avoidance, tax competition, and tax unfairness', in Jeremy Leaman and Attiya Waris (eds.), Tax Justice And The Political Economy Of Global Capitalism, 1945 to the present day (Oxford: Berghahn Books, 2013).

---, 'Egalitarian Taxation: Equality of resources, market luck, and leisure', PhD thesis (University of Warwick, 2013).

Bardach, Eugene, 'Moral Suasion and Taxpayer Compliance', Law & Policy, 11/1 (1989), 49-69.

Barro, Robert and Grilli, Vittorio, European macroeconomics (Basingstoke: MacMillan Press, 1994).

Beccaria, Cesare, An essay on crimes and punishments, trans. Edward D. Ingraham (Philadelphia: Nicklin and Walker, 1819 (1764)).

Becker, Gary S., 'Crime and Punishment: An Economic Approach', Journal of Political Economy, 76/2 (1968), 169-217.

Bedau, Hugo Adam and Kelly, Erin, 'Punishment', Stanford Encyclopedia of Philosophy <http://plato.stanford.edu/entries/punishment/>, accessed 2nd August 2013.

Bentham, Jeremy, An Introduction to the Principles of Morals and Legislation (Oxford: Clarendon Press, 1907 [1780]).

---, Selected Writings on Utilitarianism (Ware, Herts.: Wordsworth, 2000).

Bittker, Boris, 'A "Comprehensive Tax Base" as a Goal of Income Tax Reform', Harvard Law Review, 80/5 (1967), 925-85.

Brennan, Geoffrey and Buchanan, James M., The power to tax : analytical foundations of a fiscal constitution (Cambridge: Cambridge University Press, 1980).

Brewer, Mike, Saez, Emmanuel, and Shephard, Andrew, 'Means-testing and Tax Rates on Earnings', in Stuart Adam, et al. (eds.), Dimensions of Tax Design: The Mirrlees Review (Oxford: Oxford University Press, 2010).

Brighouse, Harry, 'Egalitarian Liberalism and Justice in Education', The Political Quarterly, 73/2 (2002), 181-90.

Brighouse, Harry and Swift, Adam, 'Legitimate Parental Partiality', Philosophy & Public Affairs, 37/1 (2009), 43-80.

Buckner, Lisa and Yeandle, Sue, 'Valuing carers: Calculating the value of carers’ support', (Carers UK, 2011).

Bunting, Madeline, Willing Slaves: How the Overwork Culture Is Ruling Our Lives (Harper Perennial, 2004).

Card, David E. and Krueger, Alan B., Myth and measurement : the new economics of the minimum wage (Princeton, N.J.: Princeton University Press, 1995).

Choné, Philippe and Laroque, Guy, 'Optimal incentives for labor force participation', Journal of Public Economics, 89/2–3 (2005), 395-425.

Clark, Andrew, Georgellis, Yannis, and Sanfey, Peter, 'Scarring: The Psychological Impact of Past Unemployment', Economica, 68/270 (2001), 221-41.

Clayton, Matthew, 'Equal Inheritance: An Anti-Perfectionist View', in John Cunliffe and Guido Erreygers (eds.), Inherited Wealth, Justice and Equality (London: Routledge, 2012), 98-118.

Cunliffe, John and Erreygers, Guido, The origins of universal grants: an anthology of historical writings on basic capital and basic income (Basingstoke, Hampshire: Palgrave Macmillan, 2004).

Dietsch, Peter and Rixen, Thomas, 'Tax Competition and Global Background Justice', Journal of Political Philosophy,  (forthcoming).

Douglass, Frederick, 'An address on West India Emancipation', <http://www.lib.rochester.edu/index.cfm?PAGE=4398>

---, Two Speeches (Rochester, N.Y.: O. P. Dewey, 1857).

Dworkin, Ronald, 'What is Equality? Part 2: Equality of Resources', Philosophy & Public Affairs, 10/4 (1981), 283-345.

---, Sovereign Virtue (Cambridge, Mass: Harvard University Press, 2000).

---, Is Democracy Possible Here? (Princeton, N.J.: Princeton University Press, 2006).

---, Justice for hedgehogs (Cambridge, Mass.: Belknap Press of Harvard University Press, 2011).

Elgin, Ceyhun and Oztunali, Oguz, 'Shadow economies all around the world: Model-based estimates', <http://www.voxeu.org/article/shadow-economies-around-world-model-based-estimates>

Feige, Edgar L. and Urban, Ivica, 'Measuring underground (unobserved, non-observed, unrecorded) economies in transition countries: Can we trust GDP?', Journal of Comparative Economics, 36/2 (2008), 287-306.

Fleurbaey, Marc, Fairness, Responsibility and Welfare (Oxford: OUP, 2008).

Friedman, Milton, A Theory of the Consumption Function (Princeton: Princeton University Press, 1957).

Friedman, Milton, Capitalism and freedom (Chicago: University of Chicago Press, 1962).

Goode, Richard, 'The Economic Definition of Income', in Joseph A. Pechman (ed.), Comprehensive Income Taxation (Washington D.C.: Brookings Institute, 1977), 1-30.

Haig, Robert M., 'The Concept of Income—Economic and Legal Aspects', in Richard A. Musgrave and Carl S. Shoup (eds.), Readings in the Economics of Taxation (Homewood, Ill.: Irwin, for the American Economic Association, 1959).

Halbach, Edward C. Jr., 'An Accessions Tax', Real Property Probate & Trust Journal, 23 (1988), 211-27.

Harvey, Philip, Securing the right to employment : Social welfare policy and the Unemployed in the United States (Princeton, NJ: Princeton University Press, 1989).

---, 'Funding a Job Guarantee', International Journal of Environment, Workplace and Employment, 2/1 (2006), 114-32.

---, 'Securing the Right to Work at the State or Local Level with a Direct Job Creation Program', Big Ideas for Jobs Initiative <http://www.bigideasforjobs.org/wp-content/uploads/2011/09/Harvey-Full-Report-2-PDF.pdf>

Hirsch, Fred, Social limits to growth (Cambridge, Mass.: Harvard University Press, 1976).

Hirschman, Albert O., The Rhetoric of Reaction : perversity, futility, jeopardy (Cambridge, Mass.: Belknap Press of Harvard University Press, 1991).

Hobbes, Thomas, Leviathan (Harmondsworth, Eng.: Penguin, 1986 [1651]).

Jackson, Dudley, 'Thomas Hobbes' Theory of Taxation', Political Studies, 21/2 (1973), 175-82.

Kaldor, Nicholas, An expenditure tax (London: Allen & Unwin, 1955).

Keynes, John Maynard, The general theory of employment, interest and money (London: Macmillan, 1936).

Kirchler, Erich, The Economic Psychology of Tax Behaviour (Cambridge: Cambridge University Press, 2007).

Kirchler, Erich, Hoelzl, Erik, and Wahl, Ingrid, 'Enforced versus voluntary tax compliance: The “slippery slope” framework', Journal of Economic Psychology, 29/2 (2008), 210-25.

Laroque, Guy, 'Income Maintenance and Labor Force Participation', Econometrica, 73/2 (2005), 341-76.

Layard, Richard, Happiness : lessons from a new science (New York: Penguin Press, 2005).

Mankiw, N. Gregory, Macroeconomics (New York, NY: Worth, 2009).

Marx, Karl, Capital : a critique of political economy (London: Penguin, 1990 [1867]).

McCaffery, Edward J., Fair not flat: how to make the tax system better and simpler (Chicago: Chicago University Press, 2002).

Mill, John Stuart, Principles of Political Economy: Books IV and V (London: Penguin, 1970).

Minsky, Hyman, 'The Role of Employment Policy', in Margaret Gordon (ed.), Poverty in America (San Francisco: Chandler Publishing Company, 1965), 175-200.

Mirrlees, James A., 'An Exploration in the Theory of Optimum Income Taxation', The Review of Economic Studies, 38/2 (1971), 175-208.

Mirrlees, James A. and IFS, Tax by design : the Mirrlees review (Oxford: Oxford University Press, 2011).

Mitchell, William and Muysken, Joan, Full employment abandoned : shifting sands and policy failures (Cheltenham: Edward Elgar, 2008).

Mitchell, William F., 'The Buffer Stock Employment Model and the NAIRU: The Path to Full Employment', Journal of Economic Issues, 32/2 (1998), 547-55.

Modigliani, Franco and Abel, Andrew Bruce, The collected papers of Franco Modigliani vol. 2 : The Life Cycle of Hypothesis of Saving (Cambridge, Mass.: The MIT Press, 1980).

Mosler, W.B., 'Full Employment and Price Stability', Journal of Post Keynesian Economics, 20/2 (1998), 167-82.

Murphy, Liam and Nagel, Thomas, The Myth of Ownership: Taxes and Justice, (Oxford: OUP, 2002).

Nozick, Robert, Anarchy, State, and Utopia (Oxford: Blackwell, 1974).

Parfit, Derek, 'Equality or Priority?', in Matthew Clayton and Andrew Williams (eds.), The Ideal of Equality (Basingstoke: MacMillan, 2000), 81-125.

Pechman, Joseph A., Federal Tax Policy, Fourth Edition (Washington D.C.: The Brookings Institution, 1983).

Phelps, Edmund S., Rewarding Work : how to restore participation and self-support to free enterprise (Cambridge, Mass.: Harvard University Press, 1997).

Rakowski, Eric, Equal justice (Oxford: Clarendon Press, 1991).

Rawls, John, A Theory of Justice: Revised Edition (Oxford: Oxford University Press, 1999).

---, Justice as fairness : a restatement (Cambridge, Mass.: Harvard University Press, 2001).

Rudick, Harry J, 'A  Proposal for an Accessions Tax', Tax Law Review, 1/1 (1945), 25-44.

Saez, Emmanuel, 'Optimal Income Transfer Programs: Intensive versus Extensive Labor Supply Responses', The Quarterly Journal of Economics, 117/3 (2002), 1039-73.

Sandford, Cedric Thomas, et al., An accessions tax : a study of the desirability and feasibiliy of replacing the United Kingdom estate duty by a cumulative tax on recipients of gifts and inheritances (London: Institute for Fiscal Studies, 1973).

Schanz, Georg von, 'Der Einkommensbegriff und die Einkommensteuergesetze', Finanzarchiv, 13 (1896), 1–87.

Schlunk, Herwig J., 'A Lifetime Income Tax', Virginia Tax Review, 25/4 (2006), 939-76.

Schmalbeck, Richard, 'Income Averaging after Twenty Years: A Failed Experiment in Horizontal Equity', Duke Law Journal, 3 (1984), 509-80.

---, 'Income Averaging after Twenty Years: A Failed Experiment in Horizontal Equity', Duke Law Journal, 1984/3 (1984), 509-80.

Scholz, John T. and Lubell, Mark, 'Trust and Taxpaying: Testing the Heuristic Approach to Collective Action', American Journal of Political Science, 42/2 (1998), 398-417.

Seidman, Laurence, The USA Tax: A Progressive Consumption Tax (Cambridge, Mass.: MIT Press, 1997).

Sen, Amartya, 'Utilitarianism and Welfarism', The Journal of Philosophy, 76/9 (1979), 463-89.

Shaxson, Nicholas and O'Hagan, Ellie Mae, 'Mythbusters: "A Competitive tax system is a better tax system"', Mythbusters (London: New Economics Foundation, 2013).

Sigala, Maria, Burgoyne, Carole B., and Webley, Paul, 'Tax communication and social influence: evidence from a British sample', Journal of Community & Applied Social Psychology, 9/3 (1999), 237-41.

Simons, Henry Calvert, Personal income taxation : the definition of income as a problem of fiscal policy (Chicago, Ill.: University of Chicago Press, 1938).

Smith, Adam, An Inquiry into the Nature and Causes of the Wealth of Nations (New York: P F Collier and Son, 1909 [1784]).

Stigler, George J., 'The Economics of Minimum Wage Legislation', The American Economic Review, 36/3 (1946), 358-65.

Sugin, Linda, 'A Philosophical Objection to the Optimal Tax Model', Tax Law Review, 64 (2011), 229-81.

Swift, Adam, How not to be a hypocrite : school choice for the morally perplexed (London; New York: Routledge, 2003).

Thaler, Richard H. and Sunstein, Cass R., Nudge (Cornwall: Yale University Press, 2008).

Tiebout, Charles M., 'A Pure Theory of Local Expenditures', Journal of Political Economy, 64/5 (1956), 416-24.

Van Parijs, Philippe, Real freedom for all : what (if anything) can justify capitalism? (Oxford: Clarendon Press, 1995).

Veblen, Thorstein, The theory of the leisure class (New York: Modern Library, 2001 [1899]).

Vickrey, William, 'Averaging of Income for Income-Tax Purposes', Journal of Political Economy, 47/3 (1939), 379-97.

---, Agenda for Progressive Taxation (with a new introduction) (Clifton N.J.: Augustus M. Kelley, 1972).

---, Public economics: selected papers by William Vickrey (Cambridge: Cambridge University Press, 1994).

Wallace, Sally Martinez-Vazquez Jorge Alm James, Taxing the hard-to-tax Lessons from theory and practice (Bingley: Emerald Group Publishing Limited, 2010).

Warr, Peter, Jackson, Paul, and Banks, Michael, 'Unemployment and Mental Health: Some British Studies', Journal of Social Issues, 44/4 (1988), 47-68.

Wenzel, Michael, 'The impact of outcome orientation and justice concerns on tax compliance: The role of taxpayers' identity', Journal of Applied Psychology, 87/4 (2002), 629-45.

---, 'An analysis of norm processes in tax compliance', Journal of Economic Psychology, 25/2 (2004), 213-28.

---, 'Misperceptions of social norms about tax compliance: From theory to intervention', Journal of Economic Psychology, 26/6 (2005), 862-83.

---, 'A Letter from the Tax Office: Compliance Effects of Informational and Interpersonal Justice', Social Justice Research, 19/3 (2006), 345-64.

White, Stuart, 'The Egalitarian Earnings Subsidy Scheme', British Journal of Political Science, 29/4 (1999), 601-22.

---, The civic minimum : on the rights and obligations of economic citizenship (Oxford: Oxford University Press, 2003).

Williams, Andrew, 'Equality for the Ambitious', Philosophical Quarterly, 52 (2002), 377-89.

Winkelmann, Liliana and Winkelmann, Rainer, 'Why Are the Unemployed So Unhappy? Evidence from Panel Data', Economica, 65/257 (1998), 1-15.

Wray, R., Understanding Modern Money: The Key to Full Employment and Price Stability (Cheltenham, UK: Edward Elgar, 1998).

Zelenak, Lawrence, 'Taxing Endowment', Duke Law Journal, 55/6 (2006), 1145-82.

Wordcloud of Rethinking Taxation

I quite like wordclouds, so I've made one for my forthcoming book, rethinking taxation:

Enjoy.

Is it permissible for tax authorities to withdraw money from people’s accounts?

There has recently been a bit of a brew-ha-ha surrounding the HMRC proposal that they should have the right to directly take money from the accounts of taxpayers who are in debt. Some people are outraged by the proposal but I would cautiously accept it and I thought I would outline why.

In my forthcoming book I set out some principles of taxation and it is useful to consider the proposal in light of these. The principles that are immediately relevant are that the tax system should be just and that it should not interfere with people in making their plans. I would argue that the first principle mentioned tells in favour of the proposal and that the concerns raised under the second principle do not render the proposal impermissible.

A just tax system will be one in which the right people contribute the right amount of tax. People who consistently fail to pay their debts to the tax authority clearly undermine this. Furthermore, by failing to pay they increase the costs of tax administration and thereby reduce the net contribution they make below that which they could reasonably be expected to make. Making the tax system more effective by reducing costs and increasing revenues is a good thing all round and if the proposal can achieve this then there are good reasons to allow HMRC to take money from the accounts of non-payers.

The other principle that I mentioned is that the tax system should not interfere with people’s plans. It could be that if the tax authority takes money from someone’s account then this will render them unable to do something they were planning to do with the money. However, I do not find this argument compelling as an example of breaking the second principle. If people are given plenty of warning that they will have the money taken, perhaps with attempts at contact made through several forms of media, then there is no problem here. People should not be making plans with money that is not theirs and if people have a tax debt then the money is not theirs. In an ideal world the correct tax would be withheld at source but where this doesn’t happen the person who has the tax money does not have any prior right to this money.

A further related point is that people should not be making plans with money that isn’t theirs, and so the proposal would not violate the non-interference principle. This may lead some to suggest that my defence of the proposal also implies that all debtors should have the right to take money from people’s accounts. This would clearly be untenable and so how can the seemingly similar proposal be acceptable? Courts should have the right to seize assets from financial institutions where this has gone through the correct procedure, and HMRC can undertake these proceedings.

Why should HMRC be able to do what other debtors cannot? One reason is the one set out above; people have duties to contribute their tax revenues to society and these are a stronger claim than other debts that people have entered into as part of a contract. But these other debts are based on contracts that people have entered into freely, albeit ones that should be enforced by the state if one of the parties fails in duties they have adopted through the contract. The requirement to pay tax is not of this nature however—tax is not an agreement entered into between two parties but a moral requirement for people to pay their due to the rest of society. Everyone is required to pay no matter whether they would like to or not and so it is not like society has made the mistake of making a contract with someone of poor character.

There are of course reasonable worries about proposals such as this, and sensible rules must be applied to ensure that mischief is kept to a minimum. However, there is no good reason to assume that the proposed HMRC powers are morally impermissible. 

"Rethinking Taxation" available for pre-order!

Exciting news from Bamford Towers and Searching Finance:

My book "Rethinking Taxation: An introduction to hourly averaging" is available for pre-order from the Searching Finance website!

To find out more, and to order an advance copy with £5 off the RRP, click here.

I'm sure I'll be blogging more about the book in the coming weeks and months, including putting things on the blog that had to be removed to keep the length down to a reasonable amount (and therefore the book at a lower price).