Flat-taxers

The Taxpayers' Alliance and their friends have come up with a report on taxation. I have only read the summary, but it seems that they are trying to sell a set of long-standing proposals: a flat tax and a simplified tax base. These aren't new ideas, but old ideas dressed up. I'm in favour of a change in tax base so that we can work out people's taxes on a more appropriate basis, though the proposal here seems to be far too generous to people who gain from and receive (through gifts and inheritance) large amounts of wealth. The wealthy are clearly going to benefit from this while the worst off will not.

The report is presented as if it is some kind of independent analysis, though it is perhaps better to see it as a manifesto for political influence groups. Its a coalition of people whose agenda is to make taxation less progressive and to cut public spending accordingly.

As Richard Murphy and Jon Stone point out, the idea of moving to a flat tax is to make the rich richer and the poor poorer.The summary and some of the supporting puff pieces I've read seem to be at pains to make the proposals appear reasonable and fair.

Indeed, there is a graph in the summary document highlighting that the groups who get the biggest percentage cut in their tax compared to the current system are in the lower end of the spectrum, with a slightly smaller percentage gain for each subsequent higher earning group. Such a graph makes it seem like it is pretty fair - the proposal helps the 'squeezed middle.' However, this graph is very misleading.

The first problem with the graph is that it expresses a percentage cut on current tax payments. A 50% cut for someone who currently pays a few thousand pounds is much less money than the 40% cut for the person earning a million. This graph doesn't tell us what matters, which is how much tax people pay, or how much income they will have after tax.

The second problem is that the graph doesn't tell us all that we need to know in order to compare this world the flat tax utopia. The lowest earning group seems to get a tiny tax cut, which still leaves the claim that they will be better off. Of course, as the most likely recipients of public spending, this group on average may save a few pounds on their tax bill but will lose massively in the reduction in public services. Taking from the poor to make the rich better off is another way of putting this. Perhaps some of the worst off get more than they should, but that doesn't seem like a very fair starting point for a policy to me.

The report authors may have different reasons for their involvement. They may think that progressive taxation somehow interferes with people's freedom (where freedom is defined in a very market-specific manner). They may genuinely believe that the economic growth resulting from fewer taxes would be so amazing that in the medium term even those who lose out from the reduced public spending would be better off, despite a lack of evidence to back this up.

They clearly think the Victorian times were a golden age, given that a lot of their graphs go back to the mid 1800s. Of course, British economic growth was much better in those days, and they perhaps believe that the low taxation and public spending was the reason. Of course, the lack of very much global competition in industry and the existence of a large empire with restricted trade might also have helped.

However, those of us who have read a bit of Dickens or studied some history might have heard something  about the terrible poverty, high mortality rates and restricted opportunities that many faced in those times. Again, the authors of the report might think that economic growth or their particular brand of freedom is so important that these eggs (real people) are worth cracking for the ultimate goal.

I, on the other hand, support progressive taxation on the basis that the market doesn't work equally well for all. Some people do very well out of the market while others struggle and are left behind. A market-based economy is absolutely essential, and it needs to have incentives for people to be productive. However, it doesn't have any moral value in and of itself. The benefits of the market should be shared from the lucky to the less lucky, and to do that you need to tax the lucky at a higher rate and provide an income top-up (through a negative income tax or my own proposal) or through public services that low earners would not otherwise be able to afford.

Tax deductions for charitable gifts

There has been much discussion and controversy in recent weeks regarding the proposed limits on the amount of tax relief that taxpayers can receive. I am inclined to be supportive of this idea, based on the worry that this charitable relief is effectively just a means for those with large tax bills (who are generally speaking going to be among the most fortunate members of society) to choose where government money is spent. Governments are perhaps happy to allow this loss of revenue on the basis that some of these high earners wouldn’t bother earning so high if they weren’t allowed such a large say in where their taxes are spent.

Nevertheless, despite my qualms, I will assume “charitable tax deductions” can be acceptable in what follows. Accepting this alone does not imply that there is no need for reform of this position of what I will refer to as ‘tax-privilege’ for charities. 

One line of argument in favour of limiting the deductions is that a lot of the charities are bogus, and that the wealthy use them to circumvent taxation in a surreptitious fashion. The response to this is—rightly—that if members of the public know of a bogus charity it will be investigated by the charity commission and struck off. There may be charities used for corrupt purposes, but hopefully they will be found out and their sponsors end up in the dock on charges of fraud. Whether or not this is likely to ever happen, I will assume that these cases of fraud are not a major concern. 

I still think there is a strong case to be made for reform of this charitable giving deduction, and not necessarily that of a cap of the sort proposed. My proposal is that if charitable relief is to be retained, the conditions on charities receiving tax-privilege status should be much more restricted than the conditions required simply to be registered as a charity. 

What the public do not like, I would suggest, is that those with large earnings can direct tax benefits towards their personal agendas. Charitable gifts should be directed to improving the country, the world, or the lives of the badly off. On that we can agree. However, the conditions on becoming a charity are relatively lax. The body should be set up with some kind of charitable purpose, and must not exist to enrich its owners/administrators in the same way that profit-making companies are. This is fine, but this broad church includes charities that don’t seem to be worthy of tax-privilege status. 

Two examples spring to mind. The first is religious organizations. It seems totally unacceptable to me that people should be able to redirect tax money to their preferred religion. The second is think-tanks and research charities that are clearly political. A lot of what such organisations do is not thinking up new ideas at all but rather attempting to influence opinion, media and so on in favour of their pre-existing agenda. Propaganda, if you will. But even if it was more open-minded research into issues, it is likely to attract money on the basis that it has a particular agenda. Given that the agenda is usually that of the interests of one group of society against the interests of the rest it is particularly offensive. (And it should be noted that since the charitable deductions rules apply to the very wealthy, it hardly needs to be said whose interests they would further).

These activities are not designed to improve society or help the needy, but rather to further the interests of the donor. And directing tax revenues to particular personal interests in this way circumvents democracy without gaining the intended benefit—greater resources to help those in need.

I therefore propose that the charity commission or tax authorities should set themselves the task of separating charities into those that are, and those that are not, worthy of tax-privileges for their donors. Worthy charities are those that attempt to help the needy and improve the culture of the country. Allowing tax deductions for this is not such a loss to the country since the money goes to a good cause (even if it helps those abroad). However, there will be charities that meet standard conditions for charitable status which would not meet these more stringent criteria. 

If any charities are worthy of such tax-privilege for the benefit of their donors, it is still quite easy to identify some which are certainly not. Bogus charities for one, but also campaigning charities. Governments supporting charity is acceptable. Supporting the interests of high-earning tax payers is not.

Harry and Tax reform

Harry Redknapp and his former Portsmouth associates have been cleared of tax evasion. Of course, since the money appears to have been "lost", there is no way of knowing whether it really was tax evasion or not short of a confession.

If this payment really was intended to evade tax, then we have learned that it is easy to get away with doing so. If it was not, then we have learned that tax issues are very complicated and that attempts to uncover evasion are fraught with difficulties. Innocent people have had to go through a trial because their activities looked suspiciously like tax evasion.

Presumably, the defendants were found innocent on the assumption that the payment was a 'gift' rather than a 'reward'. The tax authorities pointed out that the gift corresponded exactly to the difference that Redknapp lost on deals since his previous contract. But why should gifts--particularly ones this large--be tax-free while payments not? This is an area that is ripe for abuse.

It seems to me that this case highlights the need for a much more joined up approach to taxation before it becomes totally impossible to impose any kind of progressive taxation at all. Where there are lots of taxes (with many gaps between them) and lots of loopholes many people (almost entirely consisting of the wealthy and powerful) will be able to shift their money around in such a way as to pay very little in tax.

Some kind of comprehensive approach to taxation would help to block off these loopholes. This could be an income or consumption-based approach, though I think some mix of the two with a lean towards income would be best. Either way, with the great increases in computer power over recent years it shouldn't be too difficult to develop a system which allots each financial account to an individual and taxes them on incoming funds from other persons or companies. Recent government IT projects might give us pause, but facebook and google seem able to manage it.

I realise this solution is limited and other issues would still remain, and I hope to get the chance to write more on this in the future. However, I hope that this case encourages people to take more of an interest in tax fairness, rather than that taxes are so complicated that taxes are totally unfair as people can avoid taxes and likely get away it.

Summary of “blog thing” course

This blog post represents the final stage of the course to which I have been devoting most of my blogs up until now. The course featured some tools I already used (dropbox, twitter, my e-portfolio), and showed me new ways to use existing websites like doodle and you tube. However, most importantly, I have discovered many potentially useful new tools like slideshare, lanyard, mendelay, prezi and delicious.

I imagine that the tool I have found most interesting, and that I will probably use the most in the future is “prezi.” As it has a mind-map type interface it should be useful for helping me to understand my ideas, and then later to explain them to others.

But if I end up collaborating with others the collaborative tools, such as google docs and dropbox, may prove more useful. Mendelay may prove useful in the future if I am still writing but not affiliated to an academic institution, as my endnote subscription would come to an end.

Perhaps in the future I will make videos of myself talking about things, which could be a useful tool for explaining and disseminating my ideas.

You Tube

The penultimate blog task is to tweet and embed you tube videos. Unfortunately I couldn't find any that were directly relevant to my research, other than some dry lectures on distributive justice. So I thought I would embed an amusing video of GA Cohen, a prominent political philosopher who died a few years ago.

My first Prezi

Here is my first Prezi!

It is a presentation of my recent blog entry.

Prezi is an online presentation design website. The idea that is that there is a canvas with text and pictures and during the presentation you zoom around the canvas to look at the different parts according to a path that you have set. This is a bit more intuitive than powerpoint, as it works like a mand-map, enabling the presenter and audience to see how things fit together. During the question and answer session it is easy to scroll around the presentation to see the different elements as required.

I was a bit daunted about how long it would take to produce a presentation on this but it didn't seem difficult after watching the online explanation.

Bank failure contingency plans

Contingency planning for bank failures sounds like a very uninteresting topic. Perhaps it is. But it’s pretty important, since all banks nearly failed (and some did) in 2008 and most seem quite vulnerable to deterioration in asset prices in light of a major recession/depression. Yet despite this, banks continue largely as they did before, with huge rewards to those in the financial industry.

The financial industry appears to me to have successfully operated to transfer huge amounts of wealth from governments, taxpayers, workers, pension funds, developing countries, banking shareholders, and so on, to the financial ‘talent’ and perhaps some very wealthy people. The financial ‘masters of the universe’ appeared all powerful both before and after the financial crash.

One suggestion is that the prospect of being bailed out leads to the moral hazard of a riskier culture within the banking industry. We heard about how the banks had to be saved in order to keep cash machines and cards working, in order for the economy to function. However, if banks are too important (let alone big) to fail, then there is a big moral hazard problem. I always assumed that governments had good contingency plans, but I haven’t heard anything about the one I am about to describe. I really hope it is in place, for reasons I will explain.

My hope is that the next time there is a banking crisis there will not automatically be a recapitalisation of the existing banks at taxpayer (or more accurately, government benefit recipient) expense. Instead, I think the bank should be allowed to fail, but in such a way that the depositors have a certain degree of security (as they do) and that they can access this security without any problems.

This seems relatively easy to achieve from the perspective of the government. They just have to have in the conditions of a retail bank that they should have certain rules in place in the case of failure of a bank group. Should such a failure occur, the bank should have a contingency plan in place whereby certain designated members of staff and the bank’s information transfer immediately to a new public body charged with the orderly break-up of the bank and maintenance of the card network. The break up and so on could take a while, as there would be many assets to unravel and sell, and creditors to pay. However, the system needs to keep working in the very short term at the street level.

To achieve this I propose that the following be done beforehand. The bank would have had to pre-designate each cash and credit card with an amount of ‘credit’ (like an overdraft) in such a situation. This amount would be revised as regularly as feasible to take account of the money available to each person. Then, if the bank were to collapse, the new public body would set up a new account for each person/account with that institution. People could then use this account—with a daily limit up—to its pre-determined limit. People would be eating into the guaranteed amount of their savings that are guaranteed by the government (currently limited to £50,000). But at least they would still be able to obtain cash and obtain their necessities.

Having this smooth contingency plan in place would mean that banks would have no leverage to demand a bail-out in order to stop total Armageddon on the streets. Banks would know that if they got in to trouble they would have to get themselves out of it, which would reduce the prospect that they would take too many risks (though I’m not totally convinced of this, if banks are acting—as they seem to be—in the interests of their ‘talent’ rather than their shareholders).

One important difference between this approach and the bail-out approach is that the bank staff would work at a civil service approved wage. In 2008, bankers continued to get their huge incomes and even bonuses, supported by taxpayers, and there was nothing anyone could do about it. However, the new public body I propose would not have to honour the contracts of workers with the old company. Some would be retained, but on new temporary civil service terms. This would not only serve to incentivise shareholders to avoid risk-taking, but also the decision makers (referred to above as the ‘talent’), as they would face the loss of their contract in the event of bank failure.

Perhaps such rules are in place, but I don’t know about them. Could anyone enlighten me? Or explain why this is a bad idea?