Tim Worstall has an interesting post in which he argues that redistribution is made harder by having big government. I agree with him that:
- the poor pay too much in tax
- the state takes an unnecessarily large share of national income
- income tax should be used as a tool for redistribution
- he ignores the role of spending in redistribution; public spending – for example on pensions & benefits – is much more important for reducing inequality than taxes. Overall, taking indirect and direct taxes together, the tax system is not redistributive; and all the redistribution caused by government is the result of the redistributive effect of public spending. About half of the government budget is handed back as grants, not spent by Government on goods and services. So if you care about inequality, on the whole you want more, not less, public spending.
- he asserts (without offering any evidence) that a progressive income tax system is harder to achive if revenues are a larger portion of national income. Presumably the problem is meant to be that it is hard to tax the rich proportionately more than the poor, which is what a progressive tax system requires, as the tax take increases – but it is not clear that this is in fact a constraint on the extent of redistribution through income tax at the current rates of tax.
Both of these make it very unlikely that the size of the Government is in fact an important determinant of the extent of redistribution. I think Tim and I would agree that income tax would be improved if we could broaden the base by reducing tax exemptions and allowances and reduce tax rates – a policy which Nigel Lawson pursued with some success and which this Government has largely reversed. This tends to be progressive because many of the tax breaks and allowances benefit vocal middle class lobbies more than they do the poor. Many people on the right argue for flat taxes, and for tax to shift from direct to indirect tax. Either of these would make it harder to pursue redistribution through income tax, an objective which Tim seems (unexpectedly, to me at any rate) to embrace.