Why the left should take the flat tax seriously

Arguments against the flat tax by Will Hutton and Johann Hari show, inadvertently, why the left should take the proposal seriously.

My fear is that the debate will pan out like this. The Tories come up with a pseudo-flat tax proposal that’s nastily regressive whilst retaining tax breaks for their favoured clients, and possibly shrinking government spending. And the left reacts arguing for big government and ignoring the huge defects in our current tax system.

The problem is, though, that this system is indefensible. It imposes viciously high marginal deduction rates on low earners, and is actually slightly regressive overall; table 2 of this pdf shows that the tax system (as distinct from benefits) raises the Gini coefficient slightly. This is because the principal progressive tax (income tax – which isn’t that progressive anyway) raises only 28.4 per cent of government revenue, with much of the rest coming from regressive indirect taxes.

No-one on the left should defend this. To do risks allowing the Tories’ proposal to win.

This is just what Will’s piece demonstrates. Is this really the best he can do?:

The dead bodies floating in flooded New Orleans - 30 deaths in an old people's home alone - are a grim reminder of where the neglect of the public infrastructure in the service of tax cuts ultimately leads*.

Instead, the left should steal the Tories’ thunder by showing that a flat tax – and spending cuts - can, in principle, be progressive.

In this context, Will misses the point when he says:

It is virtually impossible to construct a flat-rate tax without massively squeezing the post-tax incomes of middle-income earners while giving the rich a gratuitously large kickback because the rate has to be set above today's basic rate of tax but below the top rate.

But there’s no necessary reason why the rate should be set below 40%. And as I’ve said, at a high enough marginal rate, a flat tax can be progressive.

So why doesn’t the left use flat tax proposals to argue for genuine redistribution? Or does the “left” consist only of Iraq obsessives and power-fuckers who cringe in front of Gordon Brown?

* Spending on public infrastructure – the capital budgets in departmental expenditure limits – account for only 5.6% of total public spending.

Comments

[dsquared]

In related news, Christmas could be turned into a fantastic holiday for turkeys if we would all adopt the traditional German Christmas dinner, but nevertheless, I think you will find it hard to persuade turkeys to vote for it.

The central principle of taxation is to extract the necessary number of feathers from the goose with the minimum of hissing. It seems pretty obvious to me that a flat tax is not the most efficient way of carrying out any sensible redistributive aim. As I said on the earlier thread, the average tax rate matters as much as the marginal one here; a large part of the "viciously high withdrawal rates" you mention above is housing benefit, but you're unlikely to convince the bottom quintile that they're better off without it.

[Snafu]

Why is there such a squeeze on the post-tax incomes of middle income earners?

[Rob Read]

By "redistribution" you of course mean legalised theft.

[Rob Read]

We need a tax system that is hypothecated so people who want to use none of the state schemes can pay ZERO income tax.

Anything else is the neo-slavery of socialism.

[dsquared]

Rob this post is entitled "Why the left should take the flat tax seriously"; I don't really think that "the neo-slavery of socialism" is on-topic.