Stunning

Flat taxes, as it happens, produces regressive tax systems (that is, the poor pay a higher share of their incomes) because, among other reasons, when combined with consumption taxes like VAT, where the poor tend to pay a far higher share of their incomes in this form of tax than the rich do since the spend a larger share of their incomes on the things that incur consumption taxes).

What?

Flat taxes are a bad idea because consumption taxes are regressive?

(I\’m under the impression, perhaps someone would like to correct me, that in the UK it\’s not so much VAT that is regressive, given the number of non VAT and zero rated items, but excise taxes which lead to the regressive nature of the consumption tax system.)

9 thoughts on “Stunning”

  1. “the poor pay a higher share of their incomes”: I take it that “income” is calculated by ignoring, for example, housing subsidies. Of course, they might well pay a higher share even after housing subsidies are included, but I’m just wondering whether there are anywhere statistics published which allow consistently for non-pay income – for the poor and for everyone else.
    (Note that I’m not suggesting that housing subsidies are gifted to all the poor nor denied to all the prosperous.)

  2. There is an argument there, don’t you think? As we’ll always have regressive consumption taxes, income taxes need to be progressive if the overall system is to be neutral or progressive. Lots of things to disagree with, but I don’t think it’s ridiculous, is it?

    Tim adds: I was leaving aside the obvious point that flat taxes can indeed be progressive. It depends upon the personal allowance that’s built in. The higher that personal allowance the more progressive the tax system is. While your marginal rate won’t change once you’re over the allowance, your average rate indeed will. I’ve not seen a definition of “progressive” that insists that marginal rates must rise, only that those with higher incomes must pay a greater proportion of their income, so we are indeed talking about average tax rates, not marginal.

    A couple of years ago (things might not be the same now) when he ASI came uot with its flat tax proposal it didn’t take someone long to point out that it would actually be more progressive than the system extant at that time….

  3. The poster above does a better job of what Murphy was probably trying to say.

    Stated in the way it is, it is ridiculous becaue any method of tax, flat, direct, consumptive, whatever, can be said to be good or bad depending upon the standpoint from which it is argued. It can, however, only be the system as a whole that matters.

    It is Murphy’s lack of understanding of how tax systems work as a whole, how much revenue they collect, how they affect behaviour etc., which makes him such a woeful commentator. I had the misfortune to deal with him when he was in practice many years back, and he was no better in that environment neither.

  4. Flat taxes do not ‘produce’ regressive tax systems – Governments do. If the flat tax were high enough consumption taxes would not be required.

    Latvia is stepping off the flat-tax system to try and maximise tax revenue in a falling economy and disguising it as more progressive. He hasn’t remarked on Latvia’s reduction in public spending and a reduction in the minimum wage though. Wonder why…

  5. What is the problem with doing away with income tax altogether and using the VAT system with multiple rates. A zero rate for food and essentials and progressive rates for other goods.
    Luxuries at the highest rate – then the more you spend the more you pay.
    One advantage of this would be the removal of the ‘black economy’ – cash for work done is OK.
    When you spend it you pay!
    Some significant redundancies and cost savings at HM Revenue & Customs though.
    What’s wrong with that

  6. The regressive effect of sales taxes on the less-well off can be mitigated either by banding as John suggests above, or via a CBI-like non-means-tested rebate equal to the tax on a basic basket of goods.

  7. The poor pay the highest rates of tax, if you include benefit withdrawal as a form of tax. Rates of 85% are common in our benefits system, creating massive disincentive to work (legally) Anybody concerned with making the tax system less regressive must include the benefits system in their calculations.

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