I\’m All of a Flutter

My word, Polly T does rather lay into the tax system today. And, umm, quite rightly too (not what you expected to read here, did you?).

Those at the very bottom pay a far higher marginal tax rate than those at the top, with a bungled benefit system imposing a 70% tax loss for every extra pound they earn.

Indeed, it\’s the overlap of the tax and benefit systems. Solvable in a number of ways: lower benefits perhaps (perhaps not a good idea), greater tapering (very expensive), no means testing of benefits (hugely expensive but possibly the way to go with a citizens\’ basic income) but te simplest i simply to take the poor out of the tax system altogether.

He could take all 10p payers out of tax altogether, a move that would cost £7bn and cut everyone\’s tax a bit, with the lowest-paid gaining most.

Of course, I and other vicious right wingers like the Adam Smith Inst would go further. Let\’s really bang that tax free allowance up to £12 k or £14 k, really take the working poor entirely out of the income tax system.

Indeed they are right as secret fiscal drag, failing to raise thresholds, has quietly brought more people into higher tax brackets – but not the richest, whose earnings rose fastest; no new tax band for them.

We\’ve been muttering about fiscal drag for a long time: as wages generally rise faster than other prices, tax bands should go up faster than the general level of prices. Something whih has deliberately not been done, pulling people into those higher tax bands indeed. We could though use this very same argument about raising the IHT limits…..given the rise in house prices.

Now the Fabian Society proposes ways to start winning back the argument. It is too late, the society thinks, to win back IHT. It suggests a capital receipts tax used in other countries, where recipients of gifts are taxed over a lifetime instead of estates after death: everyone could receive up to £80,000 tax free, with tax rising gradually until £260,000, and everything above taxed at 40%.

Not a bad idea: tax the recipients, not the estate.

How odd that, on personal allowances at least, Polly is now onside with the Adam Smith Institute.

16 comments on “I\’m All of a Flutter

  1. “Not a bad idea: tax the recipients, not the estate”.

    That is a bloody ridiculous idea. What about ‘economic incidence’? Inheritance Tax raises bugger-all-divided-by-six in the grander scheme of things and is hideously complicated. This sort of ‘transfer tax’ would be an administrative nightmare and would need a police state to enforce it (perhaps that’s the idea?).

  2. If there were no allowances of any kind so the tax system was simplified to be simply x% above a high threshold (preferably just as a flat tax) wouldn’t we have gifts and legacies being taxed to the extent they form part of the recipient’s taxable income, none (OK, less) of the avoidance Polly and the TUC complain about, and just one boundary condition where marginal rates existed?

    In passing, I’ve just been re-reading Uncle Milt’s negative income tax ideas. These seem to have some advantages over the CBI.

  3. Peter, Uncle Milt’s NIT does have much merit but also a big disadvantage. While it targets cash to those at the very bottom, its withdrawal rates whack up the effective marginal tax rate. A CBI has no withdrawal rate and, while more expensive, it does not produce big disincentives to work. The decision is really a judgement call about which is more important – least cost or least distortions.

  4. One drawback with a high tax free allowance, one that keeps a huge chunk of the population out of the tax net, is that this chunk comes to regard money from the government as free. At least if you pay tax, there’s a (very, very tenuous!) link between how much the government spends and how much you pay in tax. So, I’m in favour of a lower basic rate of tax (5%?), but a much smaller tax free allowance.

  5. “This sort of ‘transfer tax’ would be an administrative nightmare”

    It’s easy. What you do is create a property registry database, and all things you own are registered there. Anything unregistered can be confiscated. Then when you want to sell or give something away, you have to change the ownership with the database. Clearly a biometric ID card is necessary to validate identity.

    The opportunities are amazing. Property can be confiscated for inappropriate behaviour. The database can be scanned by the anti-terrorist security services (i.e. local councils) looking for criminal activity. Connected links between people can be determined and cross-referenced with EBay transactions.

    What a fantastic opportunity. All it requires is a Government with an authoritarian bent (tick) and competence in large-scale IT databases (ah..)

  6. “Why do people who don’t pay income tax get to vote?”

    Because legitimacy for governments comes from the citizens, bottom up, not top down. When governments stop legislating in ways that affect the poor, they can lose the vote.

  7. Kay Tie, you are sounding rather too enthusiastic about the whole idea… And of course, citizen’s would have to produce receipts for all their cash expendiditure together with proof that this was for own use, rather than a gift to a family member. In the absence of which, all cash withdrawn from the bank would be taxed as if it were a transfer, obviously.

    Vindico – who says CBI would be expensive? It just depends on the amount. £30 p.w. for kids, £60 for working age adults* and £120 for pensioners would cost about ten per cent less than existing welfare state/tax allowances. I can also see good arguments for CBI being £nil or also much more generous than my figures.

    * Or you can opt for a much higher tax-free personal allowance of say £10,000.

  8. “Kay Tie, you are sounding rather too enthusiastic about the whole idea”

    I forgot to cancel Evil Mode.

  9. Actually £80K gift allowance over a lifetime seems fairly low to me.
    Would that include gifts and legacies from parents and grandparents to their children? It could be argued that school fees, or help with university fees are such a gift.

    And an ideal loophole for parents seeking to endow gifts upon their kids, would be to declare those kids as employees, and the gifts as salaries. (Just like the MPs do, but using their own money, not taxpayer funds.) Closing off that loophole wouldn’t be very feasible, but the lefties would be hell bent on doing it.

  10. “£60 for working age adults”

    A week? So £3120 a year. It’s not exactly a lot of money, is it? No-one could live on it.

  11. “He could take all 10p payers out of tax altogether, a move that would cost £7bn and cut everyone’s tax a bit, with the lowest-paid gaining most.”

    Toynbee and the ASI might be talking about it, but the Liberal Democrats have actually made it a pillar of their tax policy. And they want to raise the personal allowance to £10,ooo in the future.

    One up to the Liberals!

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