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September 08, 2005

Comments

dsquared

Chris, it pains me more than I can say to come to the defence of Kamm (no really, you'll never know) but this looks more like a textbook example than a practical proposal. In the real world, would anyone ever propose a flat tax system with a marginal rate of 55%? It would certainly mean that you would need a rigorous anti-avoidance system.

Matthew

I don't follow the figures. A single parent on £200 a week according to table 1.2e takes home £337 a week. Under your system it would be £200 a week, unless you have the various benefits, which surely would raise the marginal rate past 55%?

chris

What's so unrealistic about a 55% rate? According to the Treasury (table 4.2 of the 2005 red book), over 2 million people currently face a marginal withdrawal rate of over 60%. And for 8 of the 10 years of Thatcher's premiership, top earners paid a 60% tax rate.
I'll grant you that no politician will propose it in the real world. But how many politicians in the real world have any good ideas?
Matthew - you're right. Lone parents do lose heavily in this scheme.
Note that I'm not advocating such a scheme. I'm merely showing that, in theory, a flat tax can be progressive and revenue neutral. The objections to this sort of flat tax, contra Kamm, are not that it's a tax break for the rich, but that it penalizes some groups (big families, lone parents) and/or imposes disincentivizing tax rates.
Whether these objections are decisive is, in my view, unclear.

Matthew

Ok, fair enough. Though if 2mn people (1.7m families, so perhaps more) face marginal rates over 55%, doesn't that mean 28m or so, don't? And if so wouldn't it be hard to justify it increasing incentives to work?

dsquared

Just from a political point of view, a flat tax proposal with a marginal rate higher than the current higher rate of income tax is going to attract support from absolutely nobody; higher earners will see it (correctly) as a tax rise and lower earners will assume that they will do better out of a progressive system. Also it is not just marginal rates which matter given that people vote on budgets which determine their average rates as well as the marginal; giving someone housing benefit might raise their total withdrawal rate from 25% to 60% but nobody's going to believe that it's a bad thing to get housing benefit.

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