This misunderstands who would actually gain from the measure. The vast bulk of the money goes to those earning more than £10,000. It is a very expensive tax cut, very poorly targeted on the working poor. (src)However, he misses the point. Danny studied economics, so one might hope he can appreciate the importance of numerate thinking on tax policy. Of course it is a tax cut for everyone, but it has the greatest proportionate effect on poorer workers: specifically, if one calculates the change in net income due to the tax change and divides it by the gross income, one finds that workers just at the cusp of the new threshold feel the greatest benefit. Workers just into the tax system on the old thresholds feel very little benefit, but then, they had barely any tax to pay anyway, so tweaking the tax system is never going to help them.So sure, the millionaire gets a benefit, but that is limited to a certain maximum, which must be at most a couple of thousand pounds. And maximum benefits are very socialist, right? To a millionaire, that extra money makes little difference, but to a worker on £13,000, it makes a lot of difference.Let us suppose, though, that Danny's point is taken by the Lib Dems. Can this problem be fixed? If we add another variable to our system, like the basic rate, then we can start to do clever things. For example, increasing the basic rate means we are able to claw back some of the tax reduction workers above the new threshold receive: then workers around the threshold get a double whammy, because they have the highest tax reduction and the highest felt effect.In fact, it should be possible (ignoring for a moment the existence of higher income tax bands) to specify a salary at which the net effect of taxation changes is zero, by increasing the basic rate appropriately. With a lower threshold of £12,000, if we decided to make the effect on the median salary zero (so that half the workforce felt a benefit and half, a loss), then we would increase the basic rate to about 29p in the pound. The change to the higher rate then 'freezes in' the effect on the worker, unless the higher rate is increased by the same amount. If, instead, we decided that no-one should lose out but higher-rate taxpayers should not have any benefit, then the basic rate should be raised to the more reasonable-sounding 24p in the pound.I do not know the budgetary effects of all this, but it is in principle possible to produce a policy which raises the threshold and the basic rate in such a way that a certain income level is unaffected and the budget is kept neutral, at least for a certain range of gross salaries. (Yes, it surprised me, too.) [EDIT: Later playing with a spreadsheet suggests that my initial instinct to be surprised was correct, as this probably isn't true; or at least if it is, it's only true for a range so limited as to be practically useless.] The only cost is that the party proposing this would be certain to earn headlines screaming about 'Liberal Democrat tax bombshell', even if the whole package were tailored to make the majority of people better off.A couple of notes for mathematicians: I'm working from a mental model of tax policy which supposes that the equations linking the 'tax policy' space of (change in threshold, change in basic rate) and the 'effect' space of (worker neutrality point, static budgetary effect) are linear. My quick tests suggest that works fine, although the static assumption is obviously a problem. I don't know what distribution is best to assume for incomes, but it should be possible to provide a very rough estimate if a suitable distribution can be found. Poisson, maybe?
Monday, January 18, 2010
The best tax policy on the market
The Lib Dems propose to raise the threshold at which workers start to pay tax from the current £6,500 or so to around £12,000, which is roughly in line with the minimum wage for a full-time worker. By the way, it is very clever politics: it implicitly accuses Labour of a double standard. Having decided that people need a certain amount of money to live on, Labour decides they can make do with less and taxes them.Danny Finkelstein, however, is unimpressed:
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6 comments:
Amen
You could take this a stage further and have a flat rate of income tax incorporating NI.
The reduction in admin costs would be useful, and some considerable simplification to the tax credit system would also be possible- we could restore incentives, reduce admin costs for both governmnet and employers, and have a system that everyone understands.
You're using logic against propaganda. In the USA, the Democrats use this kind of propaganda against any tax cut. They portray a tax cut as a grant from the Federal Government to the citizens, and there is always some way to portray that grant as being unfairly small for the people who need it most. In particular, they hold up the case of people who pay no taxes as a reason to oppose rate cuts. Since someone who pays zero taxes obviously gets no money when the tax rate is reduced, this is "unfair to the poor," who "don't benefit from the cut."
What they propose, instead, is creating a new welfare program of cash payments for those who don't pay taxes and calling it a "refundable tax credit."
In fairness, Finkelstein is a Tory and a 'wet' at that.
If I were allowed total free rein with the tax system, my preference would be for a citizen's basic income coupled with a flat tax on all earnt income from whatever source. Corporate income's a bit more tricky, but the basic idea would be to tax companies on UK earnings and leave shareholders untaxed.
It'll never happen, essentially because the electorate is too thick to understand why it can only work if literally everyone gets the basic payment, even millionaires. They'll ignore the fact that millionaires pay vastly more than the rebate, and insist on taking away the rebate.
Why tax corporations at all? If you're going to have an income tax, just tax dividends as normal personal income. It would significantly simplify the tax code, and the state would still get its pound of flesh.
Yes, I did think about that. I think I wanted to tax the right people and avoid double taxation. Problems arise because companies make profits overseas: this is if anything even more true in the UK than in the US.
So if you remove corporations altogether from taxation and tax home shareholders, then overseas shareholders are not touched with regard to the earnings which they have made in the UK, and home shareholders are taxed for earnings made and taxed overseas. If you tax company profits and leave capital holders untaxed, then we are taxing business earnings made in the UK (which is what we want to hit) and leaving the taxation of overseas earnings to the respective governments.
I guess that's one more reason I don't like the idea of income tax. Nailing down just exactly where you earned the income and which government gets to tax it gets slippery.
That's why I like the idea of a sales tax better. It's concrete, less susceptible to loopholes, it hits you based on your consumption rather than your production, and everyone in your country pays it regardless of immigration status.
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