Progressive flat tax?

I have a confession to make. Though I am a fully paid up lefty, I am in favour of a flat tax.

Calm down comrades. Before you take away my Guardian subscription and cut my lentil ration, hear me out.  (I’m not alone. Jarndyce, also a pinko, agrees. So, to some extent, does Chris.) 

Is it progressive? 

A flat tax can be fairly progressive, if the tax-free allowance is quite large, though this means the marginal rate has to be higher, to get enough revenue.

I’m not too worried about the efficiency costs of a moderately high marginal tax rate. As Stumbling and Mumbling pointed out, high marginal rates may not be a very big disincentive in practice.  Before you take away my subscription to The Economist as well, I do believe that incentives matter. But my guess is that for most of the population, the substitution effects are broadly offset by the income effects, and the impact on labour supply is minimal.

Admittedly, this isn’t quite as progressive as having higher marginal rates on very large incomes: but in practice those upper rates don’t raise much revenue, so they don’t make much difference to the post-tax distribution of income.

Furthermore a flat tax would, by definition, do away with a whole host of tax breaks that have been designed for the benefit of the middle classes. Getting rid of those would do more to make the tax system progressive than the regressive effects of a single tax rate.

What would it cover?

Here’s the kicker. I’m in favour of a flat tax, provided it covers all income, just like our right wing friends say. You want a broad based tax system? So do I.  To ensure that there are no incentives to distort economic behaviour, all income should be taxed equally in all its forms:

  • all income from capital, including dividends and interest (what I’m pleased to say we still call "unearned income") – which are currently exempt from part of income tax National Insurance
  • all capital gains, with no additional allowances and no exemption for houses
  • all inherited wealth (which is a form of income to the inheritor)
  • all benefits-in-kind, including company cars at full value, air miles, corporate entertainment and hospitality etc
  • imputed income of home ownership
  • Trusts and other instruments for avoiding tax
  • income of non-domiciled residents

That should do it.  If we have a broad enough tax base, we should be able to abolish National Insurance, introduce a reasonable untaxed Basic Income Guarantee, and still have a moderate flat tax on all income above the Guarantee.

Simplification

I think there was something in Nigel Lawson’s efforts to broaden the tax base and reduce tax rates.  Not because lower tax rates make much difference to economic performance, but because it is fairer to get rid of all the loopholes designed by and for political lobby groups, and because it is simpler and cheaper to adminster. 

The left should be bold enough to sieze this agenda, and use the natural transparency of a flat tax to expose the way in which the incomes of the wealthy are currently shielded from tax.

Update: 8 September – PSD Blog has this link to a Martin Wolf story in the FT

32 thoughts on “Progressive flat tax?”

  1. all capital gains, with no additional allowances and no exemption for houses

    Really? And what level are you setting your Capital Gains at? Let’s say that it’s at 22% (the proposed ASI level for Flat Tax) and you are saying that “all income should be taxed equally in all its forms”; are you really proposing to add 22% to the price of buying/selling every house? Then how do… Oh, does the state provide the housing, perchance? To poor people only though, yes?

    Owen, there a sensible reason why primary residences are exempt. It’s because, incredible as this may seem, not everybody who buys a house can afford an extra 22% on top of the price (and first time buyers certainly can’t. So, no first time buyers, no second time buyers, no buyers. Collapse of the housing market, millions caught in negative equity, collapse of the house-building market, sky-rocketing rents, and a few people (who have already bought their second, third, fourth properties to rent) at the top getting very, very rich. Worse case scenario, obviously).

    Additionally, can we please make some kind of distinction between capital and income here? The difference in terms of mobility, both socially and economically, is rather important. A house is a capital investment (and, yes, the value of the investment can go down as well as up). And call me ignorant here, but what exactly is “imputed income of home ownership”? How will that be calculated and how much will be offset by the cost of the interest on the mortgage? Is a person buying a house to rent in some way different from a company investing in a capital purchase? Will you be taxing printers on “imputed income of press ownership”? In fact, is anyone, other than the state, actually allowed to own anything in this brave, new world? Why not just legislate for that rather than dishonestly using crippling taxes as a way of destroying purchasing power?

    For instance, I spend three years squirrelling away some of my income (taxed at 22% (over the PA threshold)) into a bank account to get together a deposit to buy a flat (because prices are high and I can only afford a certain amount of mortgage). Then, I finally have enough to put down a deposit which is over the Capital Gains threshold (taxed again at 22%) to buy my house, which is already at least 22% more than it would have been so that the owner can cover their Capital Gains Tax. So, probably some tens of thousands of pounds to the government later, I’m installed in my flat. Then, my flat gains value (through no fault of my own (and every other flat has gained roughly the same amount of value so, providing that I want to live in the same area, my relative profit is zero. Let’s take somewhere like, oh, Edinburgh)) and, despite the fact that I am paying interest on my mortgage and don’t own outright, you’re going to tax my “imputed income of home ownership” as well as, when I actually sell it, my actual income (when, of course, I will pay an extra 22% on my new property (so the owner can cover his Capital Gains))? Then, when I die, my children pay 22% on that house again. You could say it’s my fault for buying a flat but, well, I’m tired of moving around, and I’d like to have something to show for what I’ve earned (which were pretty much my actual motivations five years ago).

    Meanwhile, Joe down the road has spent everything that he earns, as he’s earned it. He’s made no investment, but he’s OK because the only tax he pays is his 22% on his income (over the PA threshold). It’s quite a modest income (though not very much lower than mine), so Joe lives in a very low rent council house, and has made absolutely no provision for the future. Luckily, the state got lots of lovely lolly from my investment in my future, and is able to provide a lovely state pension, and a free nursing home place for Joe. Lucky, old Joe, eh? Joe’s children (for whom he has been receiving benefits for many years) have nothing to inherit, so they don’t pay any inheritance tax. So, Joe and Joe’s children, having reaped the benefits of other people’s investment for the great majority of their lives, contribute almost nothing financially to the economy.

    Actually, that pretty much sums up why I hate socialism, so I don’t think that we are ever going to find agreement. However, do you not find these two contrasting, yet equally heartwarming stories a little… unfair? Am, I being simplistic? Possibly, but I can give you a true comparator, under our current system, that is even more unjust than that hypothetical one, should you wish.

    BTW, are we also taking away any tax breaks on charitable donations (just one of those rich, evil capitalists’ ways of mitigating tax bills)?

    (Oh and whilst we are berating the rich, we will of course be coming down extremely hard on tax avoidance by the poor as well, yes? You know, cash jobs and suchlike. We have to be fair, after all.)

    DK

    Owen replies: DK asks “are you really proposing to add 22% to the price of buying/selling every house”. Answer: no. Just to the difference between the purchase price and the sale price – that is, the capital gain. If I buy an asset and it increases in value, and then I sell it, the difference is income. Yes, the tax on capital gains would be the same as all other income.

    One of the merits of taxing all forms of income equally is that it removes the incentive to dress up one form of income as if it is another. (It is trivially easy to turn income into a capital gain – you just create a shell company that receives the income. )

    Yes, I would remove tax breaks on charitable donations.

    The tax on imputed income on home ownership is the tax that would be paid if the landlord and tenant were two different people, one paying rent to the other. That rent would be income for the landlord (and so taxable). Home-owners combine those two roles in one person, so if you don’t tax imputed income on home ownership, the tax on owner occupied housing would be lower than the tax on rented housing; that would be unfair to the people who rent and creates an distortionary incentive towards home ownership.

    My view is that the high house prices about which you rightly complain, and the speculation that leads to the volatility you describe, are caused in part by the fact that housing is undertaxed, creating an incentive to invest too much in housing. Nobody benefited from mortgage interest tax relief: the benefit was capitalised into higher prices, we all paid more for houses, and so had correspondingly higher mortgages than if there was no tax relief. Our total mortgage payments, after tax relief, were exactly the same as they would have been if there had been no tax relief. Part of the UK’s economic problem is that too much of our savings are sucked up by the housing market. And that in turn has occurred because governments have been too lily-livered to tax it properly.

    I look forward to confirmation from the Adam Smith Institute and its various running dogs that they agree that all income should be taxed. Or perhaps their commitment to broad based tax doesn’t extend to income received by richer folk?

  2. all capital gains, with no additional allowances and no exemption for houses

    Really? And what level are you setting your Capital Gains at? Let’s say that it’s at 22% (the proposed ASI level for Flat Tax) and you are saying that “all income should be taxed equally in all its forms”; are you really proposing to add 22% to the price of buying/selling every house? Then how do… Oh, does the state provide the housing, perchance? To poor people only though, yes?

    Owen, there a sensible reason why primary residences are exempt. It’s because, incredible as this may seem, not everybody who buys a house can afford an extra 22% on top of the price (and first time buyers certainly can’t. So, no first time buyers, no second time buyers, no buyers. Collapse of the housing market, millions caught in negative equity, collapse of the house-building market, sky-rocketing rents, and a few people (who have already bought their second, third, fourth properties to rent) at the top getting very, very rich. Worse case scenario, obviously).

    Additionally, can we please make some kind of distinction between capital and income here? The difference in terms of mobility, both socially and economically, is rather important. A house is a capital investment (and, yes, the value of the investment can go down as well as up). And call me ignorant here, but what exactly is “imputed income of home ownership”? How will that be calculated and how much will be offset by the cost of the interest on the mortgage? Is a person buying a house to rent in some way different from a company investing in a capital purchase? Will you be taxing printers on “imputed income of press ownership”? In fact, is anyone, other than the state, actually allowed to own anything in this brave, new world? Why not just legislate for that rather than dishonestly using crippling taxes as a way of destroying purchasing power?

    For instance, I spend three years squirrelling away some of my income (taxed at 22% (over the PA threshold)) into a bank account to get together a deposit to buy a flat (because prices are high and I can only afford a certain amount of mortgage). Then, I finally have enough to put down a deposit which is over the Capital Gains threshold (taxed again at 22%) to buy my house, which is already at least 22% more than it would have been so that the owner can cover their Capital Gains Tax. So, probably some tens of thousands of pounds to the government later, I’m installed in my flat. Then, my flat gains value (through no fault of my own (and every other flat has gained roughly the same amount of value so, providing that I want to live in the same area, my relative profit is zero. Let’s take somewhere like, oh, Edinburgh)) and, despite the fact that I am paying interest on my mortgage and don’t own outright, you’re going to tax my “imputed income of home ownership” as well as, when I actually sell it, my actual income (when, of course, I will pay an extra 22% on my new property (so the owner can cover his Capital Gains))? Then, when I die, my children pay 22% on that house again. You could say it’s my fault for buying a flat but, well, I’m tired of moving around, and I’d like to have something to show for what I’ve earned (which were pretty much my actual motivations five years ago).

    Meanwhile, Joe down the road has spent everything that he earns, as he’s earned it. He’s made no investment, but he’s OK because the only tax he pays is his 22% on his income (over the PA threshold). It’s quite a modest income (though not very much lower than mine), so Joe lives in a very low rent council house, and has made absolutely no provision for the future. Luckily, the state got lots of lovely lolly from my investment in my future, and is able to provide a lovely state pension, and a free nursing home place for Joe. Lucky, old Joe, eh? Joe’s children (for whom he has been receiving benefits for many years) have nothing to inherit, so they don’t pay any inheritance tax. So, Joe and Joe’s children, having reaped the benefits of other people’s investment for the great majority of their lives, contribute almost nothing financially to the economy.

    Actually, that pretty much sums up why I hate socialism, so I don’t think that we are ever going to find agreement. However, do you not find these two contrasting, yet equally heartwarming stories a little… unfair? Am, I being simplistic? Possibly, but I can give you a true comparator, under our current system, that is even more unjust than that hypothetical one, should you wish.

    BTW, are we also taking away any tax breaks on charitable donations (just one of those rich, evil capitalists’ ways of mitigating tax bills)?

    (Oh and whilst we are berating the rich, we will of course be coming down extremely hard on tax avoidance by the poor as well, yes? You know, cash jobs and suchlike. We have to be fair, after all.)

    DK

    Owen replies: DK asks “are you really proposing to add 22% to the price of buying/selling every house”. Answer: no. Just to the difference between the purchase price and the sale price – that is, the capital gain. If I buy an asset and it increases in value, and then I sell it, the difference is income. Yes, the tax on capital gains would be the same as all other income.

    One of the merits of taxing all forms of income equally is that it removes the incentive to dress up one form of income as if it is another. (It is trivially easy to turn income into a capital gain – you just create a shell company that receives the income. )

    Yes, I would remove tax breaks on charitable donations.

    The tax on imputed income on home ownership is the tax that would be paid if the landlord and tenant were two different people, one paying rent to the other. That rent would be income for the landlord (and so taxable). Home-owners combine those two roles in one person, so if you don’t tax imputed income on home ownership, the tax on owner occupied housing would be lower than the tax on rented housing; that would be unfair to the people who rent and creates an distortionary incentive towards home ownership.

    My view is that the high house prices about which you rightly complain, and the speculation that leads to the volatility you describe, are caused in part by the fact that housing is undertaxed, creating an incentive to invest too much in housing. Nobody benefited from mortgage interest tax relief: the benefit was capitalised into higher prices, we all paid more for houses, and so had correspondingly higher mortgages than if there was no tax relief. Our total mortgage payments, after tax relief, were exactly the same as they would have been if there had been no tax relief. Part of the UK’s economic problem is that too much of our savings are sucked up by the housing market. And that in turn has occurred because governments have been too lily-livered to tax it properly.

    I look forward to confirmation from the Adam Smith Institute and its various running dogs that they agree that all income should be taxed. Or perhaps their commitment to broad based tax doesn’t extend to income received by richer folk?

  3. Excellent response: I broadly agree, though as I explained here, I’d tax inheritance more punitively. The housing issue is the one I need to think about. As (very) fixed capital, it might merit being treated differently to trusts, dividends and so on, all of which are long overdue closing as loopholes. Though basic incentives would tell me that taxing it at a lower rate would simply cause capital to flood in from elsewhere in the system, exacerbating the problems of DK above. Hmm.

  4. You say that
    To ensure that there are no incentives to distort economic behaviour, all income should be taxed equally in all its forms

    then note in passing that, at present,
    It is trivially easy to turn income into a capital gain

    I fear gaming; I fear loopholes. Even under your proposed system, I’m afraid some bright accountant would discover that this form of [ownership of assets at time A which one didn’t own at time A-1] wasn’t covered. More concretely, I’m absolutely sure that any government attempting to implement such a scheme would be beset by lobbyists demanding it left several of those loopholes open; many governments (certainly any hypothetical Tory government) wouldn’t even want to close some of them.

    In other words, I suspect you’re solving the wrong problem. Yes, if the flat tax were paid uniformly wherever it applied, the result would be more equitable than the current system. But surely if all our existing taxes were paid uniformly wherever they apply the result would be more equitable still?

  5. Maybe somebody can explain this to me.

    Is there an economic benefit from the tax being flat rather than moderately progressive? Most of the arguments for the flat tax i’ve heard so far have focussed on gains from making the tax system simpler and broadening the tax base by abolishing exemptions. This seems like a good (and fair) idea but it doesn’t require the tax rate to be flat. Why can’t we just get rid of the exemptions and still have a reasonably simple system of progressive marginal rates?

  6. I agree with Ben’s point. I don’t see why _simplifying_ the tax system [i.e. getting rid of unnecessary allowances and loopholes that those with clever accountants can claim] has to mean getting rid of progressivity.

    A left-wing government should recognise that, beyond a certain level, a pound of extra income means less and less to the recipient [gives less marginal utility, to use the economists’ term] and so be prepared to levy a higher rate or rates of tax on incomes above the average. Furthermore, it makes sense to make the broadest shoulders bear the heaviest burdens [if public services need funding, it is fairer to fund them by taxing those who can afford it than those who are struggling to make ends meet]

  7. Ben / GL: at least two reasons I can think of why just calling for simplifying won’t work:

    1. It’s not a sufficiently strong motivationm for reform. A flat tax is much more of a rallying cry. It’s much harder to justify exemptions of any kind when the whole point of the system you’re introducing is that it be flat. Within a system that’s already complex (progressivity), it’s far easier to justify loopholes. I guess tied up in this is a sense of what’s realistic, what can be achieved not just theoretically but politically. We’ve had progressive taxes for a while now, and calls to simplify the system, but it’s heading in the opposite direction. I suspect this is an inevitable outcome of bureaucracy, which is the enemy of the left just as much as (or even more so than) the right.

    2. Incentives: when the system is flat, incentives for higher-rate payers to avoid (not evade – I’m not talking about appeasing criminals here) disappear. A simple system (see 1.) also makes avoidance much harder. Income from the base is maximised.

  8. Thanks, Jarndyce, for the reply. I think it’s important to think about the political feasibility of tax reforms as well. However, i don’t quite agree with your point that a flat tax will get more public support than a simple progressive one.

    If you look at the campaign for the upcoming election in Germany you can see some evidence against it. Both centre-right partys (the conservative CDU and the liberal FDP) are proposing to simplify the tax system by abolishing exemptions, while still keeping tax rates progressive in the region between 12% and 39%, with a personal allowance of roughly 8000 Euros. Now the CDU has made the mistake of presenting a guy called Paul Kirchhoff as shadow-finance-minister, who has been openly in favour of a flat-tax for the past years. What has happened is that the centre-left parties have started pretty much ignoring the CDU’s actual proposals for tax-reform and have focussed on attacking Kirchhoff’s flat-tax concept, because it is a much easier target. And it seems to be working; according to the polls the CDU has lost a lot of votes since they first mentioned Kirchhoff.

    The main point of this little story is that a) most people in western Europe (left or right) have the intuitive feeling that a flat-tax is unfair and b) that makes it very easy to portray its supporters as cold-hearted conservatives who want to give tax-breaks to the rich. It seems to me that (at least in Germany) there is a lot of public support for a simple tax-system but very little for a flat-tax.

  9. I don’t understand your paragraph about imputed income of home ownership.

    The landlord has rental income which is income from running a business and is therefore taxable. The tenant has rental expenditure which is a household cost.

    In the scenario you describe the homeowner pays tax on a theoretical income. The tenant would pay nothing – he has no income. This is a disincentive to home ownership isn’t it?

    Or am I missing something?

  10. The “broadest shoulders bear the heaviest burdens” argument (on its own) isn’t really justifiable in a liberal society: just because it’s easier to tax someone, or that person wouldn’t feel it as much as others, doesn’t make it fair to do so (in the sense of equal treatment). At the very least it means that people are charged a different price for the same right/services, irrespective of whether they had earned their position in a good/moral/creditable manner. Replacing progressive taxation with something that is not only explicit about what is being taxed (thus ending the “punitive” argument) but which covers many more assets, would certainly be an improvement.

    Of course if you look in terms of “economic capability” rather than “asset allocation”, an equality-minded political philosopher would identify all sorts of other factors that wouldn’t be included in this scheme, but which would still gift some individuals economic advantages over others. I guess a “New Labour” position on wealth would be that, rather than taxing its economic value, and leaving the super-rich still very rich, it’s fairer and more reliable to curtail the political and economic ‘bargaining’ power that wealth brings.

    A couple of other points: interest from savings/investments is unearned in the sense that it isn’t a wage, but it’s a reward for the employment of capital, rather than labour. Taxing the rewards would surely affect the incentives for people to save/invest. Also, regarding inherited wealth: some elements may already exist as flows (e.g. rental income on inherited property), but if, for taxation purposes, we tax some other type of inherited object (e.g. a painting) annually on the basis of its imputed ‘income’ value, couldn’t we could end up taking more in tax over time than its actual value?

    As Oliver Kamm suggested yesterday, it would be very difficult for European conservative parties to propose any purely income-based flat-tax. Basically we’re talking about a tax system that will be intentionally ‘dumb’ as opposed to a nuanced system of taxes, flat-rate, and means-tested benefits that is harder to manage, but which is capable of adapting to more cases. So not only would it be easy for the Left to point out already wealthy people who, on paper, would be paying less income tax (in practice they might cough up more, but that won’t be known until later), but people on benefits whose allowance or Citizen’s Income couldn’t meet the costs of, say, specialist disability care.

    Finally, Bishop: I took “imputed income of home ownership” to mean a value we can use to ensure that participants in the housing market don’t benefit from advantageous price changes caused by economic fluctuations or supply shortages that were not ‘earned’, i.e. a tax on the gains from house sales, rather than a tax on living in a mortgaged property. Perhaps other people see it differently.

  11. Ben:
    _It seems to me that… there is a lot of public support for a simple tax-system but very little for a flat-tax._

    Of course. Who could be against a simple tax system (cleaner hospitals, better schools, and so on)? The question is how to get there, and as close to equitable as possible. Piecemeal reform of the current system isn’t ever going to get very far. Raising the headline rates is political suicide. Closing “loopholes” can always be presented as increasing taxes. Each would have to justified along the way. However, support a flat tax and the opposite applies: each exemption would have to be scrutunized and justified. The entire dynamic of the debate, the framing of the argument changes completely. How could you, for example, say how great a flat tax is then introduce a whole load of wheezes for high-income earners to get out of it (see Owen’s list above). The chances are you couldn’t. Path dependency matters, and the path we’re on right now is only ever going to lead to tinkering at the edges of taxing the rich. I agree with you about the problem for conservative parties grabbing onto this policy. Which is precisely why I think lefties ought to take it, a unique opportunity to expand the tax base that might even get support from the right.

    B4L:
    _people on benefits whose allowance or Citizen’s Income couldn’t meet the costs of, say, specialist disability care._

    That’s easily solved: make all specialist care a non-monetary benefit, on the basis of need, provided in voucher or insurance form, and underwritten in full by the state. If you have a bad back, fine. We’ll send you to a chiropractor, not double your benefit.

  12. I am still not convinced of the merits of a flat tax, even one with a large personal allowance.

    Jaryndice mentions that it can serve as a “rallying cry” for reform. But tax reforms rarely have “rallying cries”. They are the results of political decisions by Chancellors, ministers & civil servants. I am still thus convinced that by technocratic fiddling, by removing unnecessary allowances, we can make the system more progressive than it is now.

    A flat tax is not a new idea. It is an idea from the C-19 as, in those days, hardly anyone paid income tax [as there was a large personal allowance] and all income above the allowance was taxed at a flat rate. The idea fell out of favour in the late C19 and early C20 (because, as i have mentioned earlier, of arguments such as ‘the broadest shoulders should bear the heaviest burdens’) and so the “New Liberals” (proto-social-democrats) like Lloyd George and so forth brought in more progressive taxation. I think the 1909 “People’s Budget” brought in a new ‘supertax’ (i.e. higher top rates on top of basic rates of income tax). That caused controversey at the time and, of course, the Tory-dominated House of Lords rejected the budget.

    I think the Asquith & LG were right to push ahead with the supertax and other tax rises. I think it would be a shame if the Left today, in the 21st century, returned us to the 19th century form of income taxation and threw away the 20th century innovation of variable, progressive rates.

  13. Ben / GL : you are right: you could in theory broaden the base of tax, remove the various tax breaks, and still have two or three higher rates of tax. As Jarndyce and others have said, this is perhaps less politically achievable than moving to a flat tax, though Nigel Lawson did a pretty good job over the years moving in that direction.

    I would note, however, that a flat tax with a large tax allowance IS a progressive tax (in that average tax rates rise with income). It could be made more progressive with tiered rates – though in practice this does not make much difference as they apply to so few people – but don’t go thinking that a flat tax with a tax allowance is not progressive.

    My view is that it is a bigger prize to get rid of the allowances and loopholes, and to tax all income, than to retain the upper tiers of tax, if there is a trade off.

    Bishop Hill: The landlord pays tax on rent net of costs (which is her income from the ownership of the property). If the landlord is also the tenant (ie she is a a owner-occupier) then there should be a tax charge on the income that the landlord would have received if she had rented the property rather than lived in it. That is a tax on imputed income. Another way of looking at it is that the landlord is choosing to receive her income from property ownership in the form of a stream of benefits (housing) rather than income (rent) but it is still at taxable income.

    Under the current system, a landlord would be less likely to conclude that she should rent someone else’s house and live there, while renting out her own house, because both landlords would then have pay income tax on the rent paid, and are worse off than if they live in their own houses. By contrast, if imputed income from home ownership were taxed, there would be no tax difference between these two options and she could choose based on real underlying preferences (eg where she wants to live).

  14. The landlord pays tax on rent net of costs (which is her income from the ownership of the property). If the landlord is also the tenant (ie she is a a owner-occupier) then there should be a tax charge on the income that the landlord would have received if she had rented the property rather than lived in it. That is a tax on imputed income. Another way of looking at it is that the landlord is choosing to receive her income from property ownership in the form of a stream of benefits (housing) rather than income (rent) but it is still at taxable income.

    This is a monstrous argument. You have almost rendered me speechless. But only almost.

    The income with which she has bought that flat has already been taxed. The income of the bank to which she pays her mortgage is taxed (and therefore adds to the cost of the mortgage). And you want to tax her again? For the benefit of owning her home?

    Under the current system, a landlord would be less likely to conclude that she should rent someone else’s house and live there, while renting out her own house, because both landlords would then have pay income tax on the rent paid, and are worse off than if they live in their own houses.

    Owen, at what point do you actually consider human nature, and not this pseudo-intellectual detachment? If I buy a house, it’s because I want to live in it. If I buy a car rather than rent it, it’s because I want to drive it (or are you proposing that we tax imputed income from owning a car rather than renting it? Because that is the logical extension of your argument); if I buy a CD, I want to be able to listen to it, not rent someone else’s. If I buy anything, I want to be the one to use it because that’s why I bought it.

    By contrast, if imputed income from home ownership were taxed, there would be no tax difference between these two options and she could choose based on real underlying preferences (eg where she wants to live).

    What if she bought her house where she wants to live?

    As I said, if you believe that no one should own anything, just come out and say so.

    DK

    Owen replies: DK: Please rember that this is not an argument about whether to reduce or increase the overall tax burden – you need to talk about spending to have that conversation. This is a question about how that tax burden (whatever it is) should be distributed. If you don’t tax owner occupiers for the imputed income of home ownership then, as a group, they pay less tax than do those in rented accommodation (because the landlord pays tax on rent, and that tax is reflected in rents), and so you create a tax-driven distortion towards owner occupation. I am against that on both equity and efficiency grounds. However, you’ll be pleased to hear that if we tax imputed income from home ownership, we’d need to make mortgage interest payments fully tax deductible.

  15. The landlord pays tax on rent net of costs (which is her income from the ownership of the property). If the landlord is also the tenant (ie she is a a owner-occupier) then there should be a tax charge on the income that the landlord would have received if she had rented the property rather than lived in it. That is a tax on imputed income. Another way of looking at it is that the landlord is choosing to receive her income from property ownership in the form of a stream of benefits (housing) rather than income (rent) but it is still at taxable income.

    This is a monstrous argument. You have almost rendered me speechless. But only almost.

    The income with which she has bought that flat has already been taxed. The income of the bank to which she pays her mortgage is taxed (and therefore adds to the cost of the mortgage). And you want to tax her again? For the benefit of owning her home?

    Under the current system, a landlord would be less likely to conclude that she should rent someone else’s house and live there, while renting out her own house, because both landlords would then have pay income tax on the rent paid, and are worse off than if they live in their own houses.

    Owen, at what point do you actually consider human nature, and not this pseudo-intellectual detachment? If I buy a house, it’s because I want to live in it. If I buy a car rather than rent it, it’s because I want to drive it (or are you proposing that we tax imputed income from owning a car rather than renting it? Because that is the logical extension of your argument); if I buy a CD, I want to be able to listen to it, not rent someone else’s. If I buy anything, I want to be the one to use it because that’s why I bought it.

    By contrast, if imputed income from home ownership were taxed, there would be no tax difference between these two options and she could choose based on real underlying preferences (eg where she wants to live).

    What if she bought her house where she wants to live?

    As I said, if you believe that no one should own anything, just come out and say so.

    DK

    Owen replies: DK: Please rember that this is not an argument about whether to reduce or increase the overall tax burden – you need to talk about spending to have that conversation. This is a question about how that tax burden (whatever it is) should be distributed. If you don’t tax owner occupiers for the imputed income of home ownership then, as a group, they pay less tax than do those in rented accommodation (because the landlord pays tax on rent, and that tax is reflected in rents), and so you create a tax-driven distortion towards owner occupation. I am against that on both equity and efficiency grounds. However, you’ll be pleased to hear that if we tax imputed income from home ownership, we’d need to make mortgage interest payments fully tax deductible.

  16. Owen, I am not sure whether a flat tax is more politically possible than removing allowances. After all, removing allowances is a technical matter, whereas a flat tax would require a national change of mood.

    Furthermore, there is a danger that a flat tax would develop exemptions over time. For example, as mentioned above, there is the issue of whetehr mortgage interest should be exempt or not. Also, governments give tax allowances for ISAs and for personal pensions because they want to encourage people to take these out. Even if – rather than having 10, 22 & 40% rates – we just had one rate, there would still be people arguing for certain expenses etc to be exempt.

    I am also not convinced that people made a mistake in the 1900-1960 period by moving from flat taxes to progressive ones. It is left-of-centre governments that made these moves and they did so (a) to boost equality and (b) to raise revenue. Both of these are, to me, desirable aims. I am not convinced that flat taxes would aid these aims – as we moved away from them in the C-20 in order to promote them.

    Owen replies: GK – I am sympathetic to this view. But I’d be interested to know how much difference tiered tax rates really make to the progressiveness of the tax system. My hunch is that they are largely symbolic; and that it is much more important to remove tax exemptions which mainly benefit the wealthy.

  17. Presumably not only mortgage interest but also household maintenance would become tax deductible, assuming you are going to impute the business of property investor to homeowners. Or is this a new tax schedule – taxation of asset ownership? If it is then, as DK says, why not tax all assets? We would have to do this to ensure there was no distortion towards ownership of consumer goods as compared to houses. Should DK’s CD ownership mean that he will have the business of CD rental shop imputed to him? The cost of his CD becomes tax deductible if it does. Or would it be just CD ownership tax?

    Either way, there are going to be a lot of records to keep. Just think; if everyone is going to be a property investor, cd rental shop and so on, every home owner in the country would become VAT registered. Everyone could prepare annual accounts for the tax man. We could double the number of registered businesses in the UK at a stroke, and double the size of the bureaucracy at the same time.

    I think you’re going to have a hard time selling this!

  18. Owen replies: DK: Please rember that this is not an argument about whether to reduce or increase the overall tax burden – you need to talk about spending to have that conversation. This is a question about how that tax burden (whatever it is) should be distributed. If you don’t tax owner occupiers for the imputed income of home ownership then, as a group, they pay less tax than do those in rented accommodation (because the landlord pays tax on rent, and that tax is reflected in rents), and so you create a tax-driven distortion towards owner occupation. I am against that on both equity and efficiency grounds. However, you’ll be pleased to hear that if we tax imputed income from home ownership, we’d need to make mortgage interest payments fully tax deductible.

    Firstly, my post was in a series of essays, wherein I proposed a raft of changes, i.e. the sweeping away of our entire tax system. Taking my post out of that concept rendered it to mere reactionary ranting.

    You see tax as a means to make people equal. I don’t. People are not equal (even GCSE biology might teach you that), and your ideas are not only damaging psychologically, but also economically (since you, somewhat obtusely, fail—or refuse to—recognise the difference between capital and income. As an employee of one of the most pointless, wasteful organisations in the world, I would expect nothing less.

    Who cares if there’s no tax equality between renters and buyers. Buyers make a decision to… well… buy and renters don’t. It’s called freedom of choice. I don’t give two shits about equality. No, really. I think that if you work for the money, then you should be able to keep it.

    You still have not answered my main question: why should those who work hard and make money have it removed and given to those who don’t.

    With all due respect, I loathe socialists and your argument is one of the most, filthy, disgusting things I have read for a long while.

    When you can prove to me that you have paid your father back, for both income and benefits (housing, any other support) that he has ever given you, then I might taken you seriously. Or have you done so already, to justify this appalling argument?

    What exactly are your objections on “equity and efficiency grounds”? You have utterly failed to address the fact that the buyer pays the tax that the bank pays (rather than paying the tax of the renter). Tell you what, come to Edinburgh. I will galdly show you around houses where the people who buy them pay a lot more than those who rent. Basically, Owen, you argument is based so much in your pseudo-intellectual fantasy world, that you have absolutely no idea how people actually live.

    And, of course, you are taxing presumed income on cars, yes? You are so wrong that I can barely express it; and I thought Jarndyce was hard work.

    Regards,

    DK

  19. Owen replies: DK: Please rember that this is not an argument about whether to reduce or increase the overall tax burden – you need to talk about spending to have that conversation. This is a question about how that tax burden (whatever it is) should be distributed. If you don’t tax owner occupiers for the imputed income of home ownership then, as a group, they pay less tax than do those in rented accommodation (because the landlord pays tax on rent, and that tax is reflected in rents), and so you create a tax-driven distortion towards owner occupation. I am against that on both equity and efficiency grounds. However, you’ll be pleased to hear that if we tax imputed income from home ownership, we’d need to make mortgage interest payments fully tax deductible.

    Firstly, my post was in a series of essays, wherein I proposed a raft of changes, i.e. the sweeping away of our entire tax system. Taking my post out of that concept rendered it to mere reactionary ranting.

    You see tax as a means to make people equal. I don’t. People are not equal (even GCSE biology might teach you that), and your ideas are not only damaging psychologically, but also economically (since you, somewhat obtusely, fail—or refuse to—recognise the difference between capital and income. As an employee of one of the most pointless, wasteful organisations in the world, I would expect nothing less.

    Who cares if there’s no tax equality between renters and buyers. Buyers make a decision to… well… buy and renters don’t. It’s called freedom of choice. I don’t give two shits about equality. No, really. I think that if you work for the money, then you should be able to keep it.

    You still have not answered my main question: why should those who work hard and make money have it removed and given to those who don’t.

    With all due respect, I loathe socialists and your argument is one of the most, filthy, disgusting things I have read for a long while.

    When you can prove to me that you have paid your father back, for both income and benefits (housing, any other support) that he has ever given you, then I might taken you seriously. Or have you done so already, to justify this appalling argument?

    What exactly are your objections on “equity and efficiency grounds”? You have utterly failed to address the fact that the buyer pays the tax that the bank pays (rather than paying the tax of the renter). Tell you what, come to Edinburgh. I will galdly show you around houses where the people who buy them pay a lot more than those who rent. Basically, Owen, you argument is based so much in your pseudo-intellectual fantasy world, that you have absolutely no idea how people actually live.

    And, of course, you are taxing presumed income on cars, yes? You are so wrong that I can barely express it; and I thought Jarndyce was hard work.

    Regards,

    DK

  20. DK

    I think you are perhaps mixing up two different ways in which equality is relevant to this discussion:

    – the value (or otherwise) of using the tax system to make post-tax incomes more equal than pre-tax incomes. You are are against doing this, I surmise from your comment.

    – the value (or otherwise) of applying taxes equally to similar things, so that taxes are spread as thinly as possible across as many people as possible, and so that they distort the economic choices as little as possible.

    When I talk about the value of making tax equal between buyers and renters, it is not out of a desire to “make everyone equal”, but to reduce the damage that taxes do to the economy by minimising the distortions they cause. If you spread the burden of tax unevenly, then tax rates for some people will be unnecessarily high to offset the unevenly low taxes on somebody else, and you will create incentives for people to make choices they would not otherwise make, which is a bad thing to do. So because you are someone who strongly dislikes taxation, you should be in favour of a tax system which is as neutral as possible between the different choices people make about how they spend their money amd live their lives. This means you should be in favour of low taxes, of course, but also that you should be in favour of of equal levels of taxation on all different forms of income.

    It is equality of tax treatment in this sense that we are discussing here, not the desire to create equality among people which is what you find so objectionable. As it happens, I am also in favour of using tax to reduce inequality between people, but that is largely irrelevant to this dicussion.

    Owen

  21. Owen, i am not sure that the higher rates are ‘symbolic’. After all something like 3m people pay the higher rate of income tax [although, of course, most of them only pay it on their last couple of thousands of pounds of income since they are only just above the theshold].

    I am not sure why DK seems to be opposed to treating home ownership & renting equally. After all, if the state (effectively) subsidises home ownership [without building any new homes] as the state does now, that will mean house prices go up. In the unlikely event the state subsidised tenancy then house price would artificially fall. Assuming a flat tax is designed to eliminate exemptions it makes no sense for the tax system to favour either. If, on the other hand, as i fear, the flat tax idea in practice will serve as a marketing trick to disguise tax cuts for some high earners then it is clear why some would want to create tax exemptions for home ownership.

    It is interesting that most “flat tax” schemes end up having a similar personal allowance to nowadays and a 20 or 25% rate. It would be interesting, as Chris suggests on his blog, to see what kind of personal allowances could be afforded if the flat rate was 40 or 50%. Somehow, i doubt that would be a flat tax model that would have much appeal to the ASI 😉

  22. Taxing the imputed income of home ownership is the old Schedule A system. Before reintroducing it it would be worth finding out why it was scrapped (no, I don’t know either).

    As one of the ASI running dogs (please note, I write for their website but do not speak for them in any capacity) no, I am not in favour of the taxation of returns to saving in any form whatsoever.

    What I would be in favour of is a move to a consumption tax. (No, this is not a VAT and it is not regressive in any way.)
    Simply put there is no CGT, dividend taxation, IHT etc etc. All returns to savings (and also, all monsy put into savings) are entirely tax free, as long as they are reinvested. However, if one takes money out of savings and spends it, then that withdrawal pays the same rate of income tax as any other income.
    Think of it as having all of your savings in a giant inheritable ISA. Or a little like the SIPP that comes in in March.
    It solves one of the great problems of the current taxation of savings. Switching an investment creates the tax liability (ie, selling BP and buying Tesco). It should be that cashing in savings for consumption that creates the tax liability.

    One huge benefit of this is that those with trust fund wealth will get hit as they draw down on their inheritances.

    Would fit rather neatly with a flat tax I feel.

  23. Though this is somewhat off-topic, I am bemused by the reaction from Devils Kitchen, and others who have commented at his blog, to the unremarkable suggestion that owner-occupiers might pay tax on imputed income. They accuse me of “anarcho-taxation”. It reminds me not to take it for granted that everyone understands the basic economics of taxation:

    – First, taxation of imputed income from housing assets is hardly a new idea. Switzerland (see here – the Swiss are hardly anarchists) and Italy have just such a tax, and as Tim Worstall reminds us above, the UK used to have it too, before it was abolished in 1963. (I assume that it was abolished in the UK because the middle classes are generally pretty good at lobbying for the abolition of taxes that they disproportionately bear.)

    – Second, there is a distinction between taxing capital, and taxing income from capital. Even if you do not approve of taxing capital, it is quite different from taxing income from capital. An imputed tax on owner-occupation is taxing income from capital – exactly analogous to taxing dividend income from share ownership, or indeed taxing salaries (which are income from human capital).

    – Third, it is wrong to think that taxing owner-occupation will increase house prices. If anything, the opposite is likely to be true. If the tax on dividends were increased, do you think that the price of shares would go up or go down? Down, of course. If you tax the imputed income of home ownership, this will make owner-occupation a less attractive investment, and house prices would fall, other things being equal.

    – Fourth, the overall level of taxation is determined by the amount of Government spending, all of which has to be paid for now or later. If you want to reduce the overall level of taxation, you need to reduce spending. (As it happens, I would be in favour of reducing UK Government spending.) That is a separate question from thinking about which taxes it is best to use to obtain the revenues you need. Reducing a particular tax will not reduce the tax burden overall – it will merely change the distribution of tax. A decision to have a lower rate of tax on owner occupation that other forms of income will not reduce overall tax; but it will benefit those who own their own house at the expense of people who do not.

    – Fifth, taxes do least damage when they minimise the distortion of economic decisions and when they are a low as possible. Taxing rented housing more than owner-occupied housing, and so distorts housing and investment decisions towards owner-occupation. This makes owner occupation more expensive (because it is more lightly taxed) than renting.

    I am sorry to have to spell this out at such length, especially when it is tangential to the main question of whether we should have a broad-based tax with fewer exemptions and also fewer tiers of tax rates, as proposed by a flat tax. But I hope this explains why a tax on imputed income from owner occupation is not a crazy socialist conspiracy, but a sensible policy to reduce tax-induced distortion in the market, and correct the implicit middle class subsidy of lower rates of tax on owner occupation than other housing and otheriincome from investments.

  24. Tim Worstall remarks that he prefers a flat consumption tax to a broadly based income tax.

    As I assume Tim knows, a fully applied, flat rate comprehensive expenditure tax (CET) is, in theory, identical in incidence and effect to a fully applied, flat rate comprehensive income tax (CIT).* This is pretty obvious when you think about it: the difference between the two is whether you tax the money on the way in or on the way out.

    Ironically, Tim’s proposal to tax all spending is technically equivalent to taxing all income, including from savings, though he says he is against taxing savings.

    In a pure form, both a comprehensive income tax or a comprehensive expenditure tax are proportional (that is, neither progressive nor regressive). However, one difference between them is that if you had a comprehensive income tax, you could, if you wanted, introduce a tax-free allowance, which would make the tax progressive. That is not so easy to achieve with a comprehensive expenditure tax – which is perhaps why Tim prefers it. (You could achieve similar results by complement a comprehensive expenditure tax with a flat-rate basic income guarantee paid to everyone.)

    [* Note that a comprehensive income tax would tax inheritance as income; and a comprehensive expenditure tax would tax bequests as expenditure.]

  25. Owen,

    Yes, I understand why you want to do this, but you haven’t actually answered any of my problems with it.

    house prices would fall, other things being equal.

    I said that this would happen. You might not end up with my worse-case scenario, but you would be likely to.

    exactly analogous to taxing dividend income from share ownership, or indeed taxing salaries (which are income from human capital).

    You make it sound like slavery; but you look at it from entirely the wrong (from my point of view) end of the spectrum. You see exploited workers; I see punters taking a risk (and, believe me, shares are far from being a sure thing. Ask Railtrack shareholders, for starters. No, they shouldn’t get any compensation).

    Fourth, the overall level of taxation is determined by the amount of Government spending, all of which has to be paid for now or later.

    True. I think that government spending is out of control. I only hope that Gordon bankrupts us before the next election…

    DK

  26. Owen,

    Yes, I understand why you want to do this, but you haven’t actually answered any of my problems with it.

    house prices would fall, other things being equal.

    I said that this would happen. You might not end up with my worse-case scenario, but you would be likely to.

    exactly analogous to taxing dividend income from share ownership, or indeed taxing salaries (which are income from human capital).

    You make it sound like slavery; but you look at it from entirely the wrong (from my point of view) end of the spectrum. You see exploited workers; I see punters taking a risk (and, believe me, shares are far from being a sure thing. Ask Railtrack shareholders, for starters. No, they shouldn’t get any compensation).

    Fourth, the overall level of taxation is determined by the amount of Government spending, all of which has to be paid for now or later.

    True. I think that government spending is out of control. I only hope that Gordon bankrupts us before the next election…

    DK

  27. Apologies, I wasn’t clear enough.
    Yes, much of what Owen says about income and expenditure taxes is correct. I didn’t mean that I don’t want the taxation of returns from savings although that is indeed what I said. I meant that I don’t want savings to be taxed while they are still savings. I want them to be able to switch and to compound free of taxation (very unlike our current system) and only be taxed when they cease to be savings and become consumption.
    Yes, taxation of all expenditure is the same as taxing all income, except with the one difference, that of the taxation of savings, both what is put into savings and when the returns are taxed. Which is about where we came in.

  28. I don’t buy this:

    “An imputed tax on owner-occupation is taxing income from capital – exactly analogous to taxing dividend income from share ownership, or indeed taxing salaries (which are income from human capital).”

    No dividend is imputed to shares which don’t actually pay a dividend. What then is special about housing as a form of capital that means income derived from it should be taxed by imputation rather than when actually earned. If I take a sabbatical or become unemployed, should I still pay tax on an income imputed to my human capital? The analogy you claim seems to me to be far from exact.

    I wonder if the reasons why your proposal seems wrong is this: when you buy a house you are engaging in a capital transaction and are exposing yourself to considerable risk. You should therefore only be taxed when that risk turns out in your favour – ie when a profit is actually earned. Renting involves passing the housing market risk on to someone else and as they carry the risks and rewards, they also need to cover the tax liabilities.

    In a nutshell then, I think you are confusing taxation of capital transactions with taxation of revenue transactions. Unless you take into account the risk involved in the capital transaction, you are going to distort the market.

    (Confession: I’ve only read one economics book)

    Owen replies: BH – there are two possible forms of income from home ownership. One is a capital gain (ie the value of the asset goes up). I agree that this should be taxed when the gain is crystallised (as you say, when that risk turns out in your favour).

    But there is a second income from home ownership, which is reaped not as monetary income but as a stream of housing services. You live in a house from which you directly benefit. If your employer provided you with a large house to live in, you would be taxed on that as a benefit in kind, because it a form of income. And one way of valuing the stream of services from living in a house is to ask yourself what rent you would have to pay to live in a similar house.

    Though it seems a bit strange to tax somebody for the benefit of living in their own house, it is unquestionably a form of income which they get from an asset they own. If you tax the income from other assets, but not the income from this asset, then you will create a distortion in the tax system which, for the reasons set out above, is not a good thing to do.

    I hope that makes the point clear?

    Owen

  29. Tim

    I agree that we currently double-tax savings and that we shouldn’t. (For those who haven’t been following this, savings are currently double taxed because we tax the returns on savings made out of post-tax income.)

    In a Comprehensive Income Tax, you should allow all savings to be made out of pre-tax income. This would result in the same tax incidence as a Comprehensive Expenditure Tax.

    Owen

    (And, for the record, a Comprehensive Expenditure Tax should tax the imputed rent paid by owner occupiers in exactly the same way as a Comprehensive Income Tax would tax the imputed income received by owner occupiers.)

  30. You say “unquestionably” without any justification IMHO. There is no income in the proper meaning of that word. There is a benefit of course, but one that has been paid for. This answers your point about receiving a house from an employer – it has been given in lieu of cash so of course it should be taxable. This is in no way analagous to buying a house yourself.

    Can I gently press you on the point about why a taxable benefit should be imputed to housing but not to other assets?

    Owen replies: You are right that it is hard to come up with a really good definition of income.

    The most widely used version in economics is known as the Hicks (or Haig-Simons-Hicks) definition: “income in a given period of time is the maximum amount that can be consumed in that period while keeping real wealth unchanged”.

    When you live in a house, you are consuming the benefits of the capital asset (namely, you live in the house so you get accommodation). That is a valuable stream of benefits. Other things equal, if you live in a house for a week, and your real wealth is unchanged from the start of the week to the end of the week, then your income is the value of the housing services you have consumed.

    So the reason that employer-provided accommodation is income is not because it is in lieu of something else, but because it provides a stream of benefits to you which you don’t have to pay for. So it is income, within a reasonable definition of the word. And so is the stream of benefits that an owner occupier gets from the house they own.

    You are right: I owe you an answer on the tax treatment of income from other assets. In principle, consuming the benefits of other capital assets – such as a car – might be treated the same way. If you did this, you would need to make the spending to buy the asset tax deductible (as you would make mortgage interest tax deductible if there was an tax on the imputed income of owner occupation). In most cases, it is not worth doing on de minimis

  31. Owen, I was about to invite you to have a look at Tim’s post and think about the kind of proposals you’re getting into bed with but apparently you guys never even reached the bed and ended up on in flagrante on the back seat of the taxi home.

    Any system in which the burden of taxation falls on consumption, and in which savings income isn’t double-taxed, is a system in which the poorest pay proportionately the most. You can b*****r about with marginal rates as much as you like but this will be the case. If you’re going to allow income from capital to be free of tax then damn right the upper middle classes won’t have the incentive to avoid tax; you’ve already given them the tax system of their dreams.

    Furthermore a flat tax would, by definition, do away with a whole host of tax breaks that have been designed for the benefit of the middle classes

    It wouldnae. Not by definition. The complicated thing about the tax system is not that it has three rates. The complicated thing is the calculation of the tax base.

  32. As a result of this discussion, I have changed my mind. I have been persuaded by the cogent arguments put here by Geriatric Labour, Dsquared, Ben, Phil and others. (Learning from others is one of life’s great pleasures; how sad that so many people refuse to avail themselves of it.)

    I now see the issue differently, in the light of the contributions that you have all made here, and the writings of Jarndyce and others elsewhere.

    If there was a straight choice between something broadly like the current tax system, or a tax system with a very broad tax base including all income but levied at a single marginal rate (above a tax free allowance), then my preference would be for the latter. I still think that the exemptions from the tax base – the results of decades of special pleading and lobbying by the middle classes – do more harm to taxation (both in terms of complexity and progressivity) than the advantages of having several tax tiers. If I could trade the upper tiers of tax for a comprehensive tax base, I would do so.

    But as a number of people here have pointed out here, these are separate issues. Dsquared points out that the complexity of the tax system – the ambiguities, the exemptions that cater for particular interests, the definitions and imputations, and consequently the adminstrative burden – lie in the definition of the base, not in the number of tiers of tax that are applied. Reducing the number of tax rates will not, of itself, address these questions.

    Advocates of a flat tax may be right that tearing the whole thing up and starting again is the only way that we will get the issues of the tax base addressed. But it seems equally likely that the advocates of a flat tax from the Adam Smith Institute and other right of centre thinkers would reduce the tax rates without significantly broadening the base. And that would be a disaster.

    To some extent, the stated aims of the proponents of flat tax – a simpler, fairer, less distortionary and easier to administer tax system – would be achieved by a fully comprehesive income tax base. But some components of a comprehensive base – such as imputed incomes on home ownership, capital gains tax, and the tax treatment of savings – would add to rather than reduce complexity compared to the naiive and relatively simple taxation of labour income. So I am not even sure that we can throw back at the Adam Smith Institute their own argument for simplicity as a reason for a fully comprehensive tax base (though they would be pushed in this direction to the extent that they wanted to reduce economic distortions and promote fairness).

    All in all, this has been a most enlightening discussion. I continue to believe that the distortions and exemptions of the tax base are a much more fundamental concern for progressive policy-makers than the top tiers of income tax; but I have been persuaded by this discussion that moving towards a flat tax is unikely to be an effective way to address that issue.

    Owen

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