The principle behind a flat tax is that every working individual should contribute the same proportion of their labour to the state, and it is diametrically opposed to a progressive tax, where the richer strata contribute a larger proportion of their labour to the state. Apparently, some say, this is justified because rich people don’t spend all of their money, and state-funded institutions are intrinsically better than capital laying around in banks.
Most countries have progressive taxes, with a small fraction of governments using flat fiscal policies to finance themselves. Although progressive taxation definitely has its merits (as well as considerable drawbacks), waves of economic turbulence in the past few decades have left voters more comfortable with even higher rates of tax for the richer, and richest, strata of income-earners. What this has ended up with, though, is an extreme broadening of the tax base, and budgets becoming far too reliable on the very few.
Compared to 35 years ago, today’s 1% contribute almost three times as much in Britain and the US, where the UK budget relies on the British 1% for 28% of income tax receipts, and the US budget 46%. Meanwhile, over 40% of American households do not pay any income tax, and in the UK 1.3m jobs have been created since 2009, but the tax base has removed the income tax burden on 2.2m income-earners in the same time. This concentration is equally found for corporate taxes, I quote from The Economist, where 830 British firms account for 50% of corporate tax receipts, and in the US five industries that make up a third of the country’s companies account for 81% of corporate tax receipts. This is due to two factors: primarily, there are far too many deductions and tax loopholes, and secondly, although this applies more to corporate tax revenue, companies have figured out ways to shift profits abroad to pay lower taxes elsewhere.
This doesn’t seem like a problem if the economic clock keeps on ticking normally, but George Osborne, Britain’s Chancellor of the Exchequer, is having some trouble defending Britain’s latest “tax-free recovery”, where the economy’s pace has quickened from a slump just a year ago, and unemployment has been shrinking just as fast, but income-tax revenue is falling even without any tax cuts.
A second article from the same issue goes on, the UK’s marginal tax is too broad and too progressive, fuelling its unhealthy reliance on richer income earners. An accountant making £28,000 ($45,600) pays four times as much income tax as does a cleaner making £14,000 ($22,800), notes the article, adding that “reverse fiscal drag”, where inflation outpaces wage growth, leads workers to be put into smaller tax brackets, paying less than they otherwise would have. This makes tax revenues much, much more volatile. The state has set more and more regulation on the City, for instance, which conversely led to smaller tax revenues after bankers had to be laid off and bonuses cut.
Britain’s cost-of-living crisis comes into play here as well, where Labour MPs are keen to highlight stagnating wage growth in the UK. This financial year, there has only been a 0.1% increase in weekly earnings, even if the economy is roaring and there is a huge demand for jobs. Personally, I think we can attribute low wage growth to the way in which the employment recovery is structured: the UK cut business taxes and expanded its tax-free bases, which made companies more inclined to hire and workers more inclined to work. A higher demand for workers traditionally means higher wages, but self-employment and zero-hours contracts have replaced traditional jobs. As time progresses, however, I am sure that there will be a progression as well in wages, seeing as more people would climb the ladder into better-paying positions, thus annulling the current cost-of-living crisis. Secondly, I would like to see the narrowing tax base made more compact and “flatter”, making the national budget less susceptible to huge changes depending on economic fluctuations.
So, NSG, what do you make of this? How progressive is the ideal income tax system? How much should the 1% pay more than the other 99%? Should they even pay more at all? And how about your opinion on Britain’s job-rich, tax-poor recovery? Corporate tax is the subject of a different debate, however, and we are going to concentrate more on how too much progressivity in income tax makes for terrible fiscal policy, and how the best tax policy is that which is levied more or less equally all around the economy. Not necessarily flat, no, but of one or two, say, tax brackets at the most, I say.
One source, and I couldn't quite find the second one, but there are less numbers for that one.
