Yves here. Richard Murphy provides an important piece on the motives of the proponents of a flat tax. Quelle surprise! It’s yet another flavor of the Grover Norquist scheme to shrink government to be so small it can be drowned in a bathtub. Of course, supersized militaries are somehow exempt.
Murphy clearly considers the notion that government does not contribute to economic growth to be so ridiculous that he does not deign to debunk it. Let me provide a few examples to fill in the gap. None other than the diehard neoliberal Larry Summers pointed out that spending on infrastructure, such as roads and bridges, in case of deferred maintenance and a shortfall of new spending (endemic in the US and UK), GDP growth will exceed the amount of spending, by as much as 3x. So the outlays more than pay for themselves.
Similarly, Mariana Mazzucato, in her book The Entrepreneurial State, explains long form that only governments can fund basic research, due to the private sector being unable to withstand the uncertainty of payoffs, the absolute level of spending needed, and the often long time frames. The Apple iPhone uses 12 technologies that came out of government-paid research. Similarly, the US pharmaceutical industry depends on Federal support, between grants for research (the NIH is the biggest but far from only source) and many tax breaks and credits. This is why it is outrageous that the US neither seeks to control prices on drugs that use US-funded intellectual property, or even demands licensing fees.
But in the US, there is perilously little risk a flat tax will ever happen. First, the US uses tax gimmicks extensively, even for regular taxpayers, as a way to deliver incentives on the cheap. They often take the form of tax credits, which are of little use to low-income voters due to the delayed receipt and their low marginal tax rates. From Brookings in Tax Credits: Social Policy in Bad Disguise, back in the day when it was much more left wing than now (mind you, no orthodox outlet even now admits that Federal taxes do not fund Federal spending; they merely create incentives, disincentives, and redistribute income):
The rise in the use of credits is probably best seen as the outcome of an ill-fated political compromise. Republicans like credits because they look like tax cuts. Democrats like them because they advance social policies without raising government spending Both sides are getting a bad deal.
Unfortunately for Republicans, targeted tax credits do not make government smaller. It’s true that a spending program raises official government outlays, whereas a credit does not. This occurs because the budget records the expenses associated with a credit as a reduction in tax revenues, rather than as outlays. But this does not mean that government has claimed less of the private sector’s resources when using a credit, because, in either case, the program has to be financed….
Unfortunately for Democrats, credits are a poor way to administer social policy. Unless the credits are refundable—that is, unless they actually give people cash back instead of just reducing tax liabilities—they will not help low-income households….
In contrast, programs that have benefited children most provide services directly to the kids—including public education, Head Start, and Medicaid.
By Richard Murphy, part-time Professor of Accounting Practice at Sheffield University Management School, director of the Corporate Accountability Network, member of Finance for the Future LLP, and director of Tax Research LLP. Originally published at Fund the Future
According to the Guardian, Kemi Badenoch said yesterday that a flat tax rate is an “attractive idea”.
A flat tax is a far-right obsession on which I did a lot of work around 2006, including visiting Eastern Europe to discuss the issues at IMF-organised meetings, which had the very obvious goal of trying to prevent flat taxes from happening. I came to some very obvious conclusions, which I summarise in this blog, first written in 2016, but I have no reason to alter much of it now:
The age-old flat tax debate appears to be rearing its ugly head again.
I said most of what I needed to say on this issue a decade ago in an ACCA-funded report on this issue.
But let me reiterate three things.
First, flat taxes are not flat. All they do is eliminate the top rates of the one rare progressive tax most countries have, which is that on income. The result is that flat taxes create more regressive tax systems.
Second, flat taxes per se do not actually simplify anything. That is because they do not even charge a single rate of tax. They invariably have a nil rate band, meaning that a person’s income has to be split into bands to calculate the tax due. The only simplification, then, is to take out a higher band or bands, which effectively saves almost no time and effort at all.
Third, all the complexity remains in calculating what income is: it has to if injustice is not to result.
There is then just one reason for flat tax and that is to reduce tax on the best off by cutting the size of the state dramatically. How do I know? Alvin Rabushka, the man who created the idea, told me this in 2006 when researching the ACCA report:
The only thing that really matters in your country is those 5% of the people who create the jobs that the other 95% do. The truth of the matter is a poor person never gave anyone a job, and a poor person never created a company and a poor person never built a business and an ordinary working class guy never drove economic growth and expansion and it’s the top 5% to 10% who generate the growth for the other 90% who pay the taxes to support the 40% in government. So if you don’t feed them [i.e. the 5%] and nurture them and care for them at the end of the day over the long run you’ve got all these other people who have no aspiration for anything more than, you know, having a house and a car and going to the pub. It seems to me that’s not the way you want to run a country in the long run so I think that if the price is some readjustment and maybe some people in the middle in the short run pay a little more those people are going to find their children and their grandchildren will be much better off in the long run. The distributional issue is the one everyone worries about but I think it becomes the tail that wags the whole tax reform and economic dog. If all you’re going to do is worry about overnight winners and losers in a static view of life you’re going to consign yourself to a slow stagnation.
As for the role of government, he said:
I think we should go back to first principles and causes and ask what government should be doing and the answer is “not a whole lot”. It certainly does way too much and we could certainly get rid of a lot of it. We shouldn’t give people free money. You know, we should get rid of welfare programmes, we need to have purely private pensions and get rid of state sponsored pensions. We need private schools and private hospitals and private roads and private mail delivery and private transportation and private everything else. You know government shouldn’t be doing any of that stuff. And if it didn’t do any of that stuff it wouldn’t need all of that tax money so that’s the fundamental position and as long as you’re going to have government do all that stuff you’re going to have all those high taxes.
As he also made clear, that then lets you have a flat tax. But in that case, what I wrote for the Guardian in 2005 (not available online) is true:
Flat tax is not a serious attempt at taxation, but is instead an exercise in social engineering. That is why its innocent appeal is so dangerous.
That ‘social engineering’ process is designed, as Rabushka himself say, to ‘take the tax code out of the economy‘. In other words, it leaves people wholly dependent upon market forces. The consequence happens to be that politics is neutered on the way because, as anyone who follows general elections knows, at the end of the day, politics is about the economy. Rabushka and the right wing want to stop that.
And if you don’t believe me, John Meadowcroft, who wrote for the Institute of Economic Affairs, a think tank Margaret Thatcher still supports, said in 2005 (or thereabouts) when asked if he thought democracy a ‘market institution’ (when undertaking an interview on www.transformingbusiness.net but I cannot now trace the original link) that:
Democracies and free societies tend to go hand in hand. Having said that, democracy tends to lead to socialist policies, such as protectionism. If democracy leads to property rights and the rule of law, then yes, you need democracy. But otherwise, democracy is not a prerequisite for a market economy. Democracies tend to create very large states. In most European countries, including the UK, nearly half of GDP goes to the state. This is not good for the creation of free markets.
It seems fair to conclude that some on the right-wing now think democracy can be sacrificed to the market, and I believe that a flat tax is part of that process. Which leads to the conclusion that two writers (Hettich and Winer) have put forward that:
“It is possible to have a flat tax, or to have democracy, but not both”
I concur.
11 comments
Comments are closed.
If the state is viewed as a market, then it seems perfectly reasonable to impose higher tax rates on the capitalist class, which employs workers educated and kept healthy by the state and uses the infrastructure created by the state to provide goods and services, than on the working class.
Isn’t this the point where someone cites the Princeton-Northwestern work of Gilens and Page about how the US doesn’t have a democracy already anyway, but an oligarchy?
Excellent reminder from Murphy.
I’d be willing to make a deal though – I’ll pay a flat tax in exchange for legalizing grand larceny against wealthy individuals.
Maybe one small upgrade to this reposted essay is in order. When Murphy writes –
“…a think tank Margaret Thatcher still supports….”
– it made me think for a half second that the old battleaxe was still fogging a mirror. At least we’re rid of her, if not her ideology yet.
Not just one, but two good ones, thanks, Mike Liston
Richard Murphy’s heart is in the right place. Calls for a flat tax are usually the thin end of the wedge and are really calls to shrink the state, until it can be drowned in the bathtub.
But there are a lot of assumptions he doesn’t question and the whole aside about flat taxes having a personal allowance and thus not being really simple is childish whataboutism. The problem of progressive tax rates is (i) there is an inevitable set of glosses to deal with edge cases that are consider more or less deserving than the central case and (ii) a system of high marginal tax rates invariably drives the wealthy to find arbitrages, even at the expense of malinvestment (*).
Would it be so terrible to have a flat tax on earned income and a flat tax on unearned income, at very different rates? How about 0% on labour and 80% on unearned income? That’s pretty simple and would be *very* progressive and simple to implement. (OK, something would need to be done about pensions and transformation of unearned into earned income but all tax systems end up hedged with avoidance rules: we’d simply end up with a deeming provision that monies paid from a registered pension scheme are (deferred) labour income and another deeming provision that money paid in excess of a defined multiple of a company’s average salary (i.e. to the oligarch owner) is a deemed distribution).
The issue is not flat taxes but the level and what is taxed….
(*) a nice example from today’s UK news is that the founder of Brewdog breweries postponing his marriage in order to access income tax and capital gains tax relief (how romantic!) on his celebrity girlfriend’s dog food business (how glamorous!).
https://www.theguardian.com/business/2024/dec/17/for-richer-or-poorer-brewdog-co-founder-may-delay-marriage-to-max-out-tax-relief
I had a different suggestion in mind, also simple: Have the same progressive income scale regardless of income class. It’s simple! (But the simplification was never the goal.)
Speaking about simple, in one of the many extra books on the Foundation that Asimov wrote (or maybe in one of the original trilogy, but I don’t think so), there is a scene where a new minister has come to power in the Empire and he takes Hari Seldon’s warnings about the empire’s demise seriously. So he gets Seldon into his office and asks how he can save the empire. Seldon replies that he can’t. Then he asks Seldon how to simplify the imperial tax system. Seldon replies that the simplest tax system is a head tax.
A head tax is implemented, riots ensue, the minister falls. Seldon vists him in prison and the (former) minister asks why he suggested a head tax if it wasn’t good. Seldon replies “I said it was simple, not that it was good”.
Margaret Thatcher died to much rejoicing in many parts of the UK: “Ding dong the witch is dead!”
Unless the author has a direct line to heaven or hell, he cannot possibly know what she’s supporting these days… worms with indigestion?
I am in the far-right state of Massachusetts, where the state income tax is a flat 5% (except as of 2023 it also has a surtax of 4% on everything over $1,000,000).
There is also a regressive sales tax of about 7% (does not apply to food, clothing or medication).
Which I guess proves the author’s point, since income inequality here is extreme and US citizens have been fleeing for decades, replaced by international immigrants who cram into slums.
As for democracy, the typical primary or general election ballot has more uncontested races than not–and for the contested races the Democrat is usually a shoe-in anyway.
I just think the use of the term “far-right” and the general framing is misleading.
OTOH, unlike the federal government, the tax on unearned income is much higher.
1) government creates (fiat) money that is redeemed as future taxes. 2) banks create (credit) money that is redeemed as future loan repayments. 3) credit money becomes equal to fiat money when the state guarantees bank deposits. 4) taxes do NOT fund spending they maintain the value of the currency. 5) money is entirely a creature of the state and the very notion of drowning the state in the bathtub will destroy not only the state but money itself. What will result is something like a viscous feudal system underpinned by violence. 6) free markets – by mathematical proof -,cannot achieve equilibrium and only fiat money without debt obligation can stabilize markets – the lesson of the 2008 crash if the lesson was even needed.
In short, flat-taxers have not a clue, are economically illiterate and ideologically besotted.
Governments create fiat money for public purpose determined democratically. It is either redeemed as taxes allowing the real economy to grow or stays in the economy as savings. Some savings are obviously a good thing but too much is not because it takes money out of the real economy and bids up asset prices.
The subtle question is how best to tax. Payroll deductions are nothing more than a tax on paycheques – draining money before it is even spent is not a very sensible idea. Taxing income is a little better and taxing spending (VAT) is little better still. But an ideal tax drainage system will allow government spending to circulate in the economy creating commerce before it is taxed back. And what would that look like – taxes on corporate profits and on anything that looks like a cancer of accumulated savings anywhere in the economy, in other words the wealthy. It doesn’t mean there should be no wealth but it does mean wealth should be – actually, must be – constrained by democratically accepted norms.
The clear lesson since Reagan/Thatcher has been accelerating inequality to the point that basic survival for many in the west is threatened and a decent life is becoming a dream – because fiat money has been austeritized and replaced by interest bearing credit money. At the same time our economies have become deindustrialized and financialized and the financial sector has become a cancer on our economies sucking out their very lifeblood – money.
Agreed but vilifying “flat tax” as a metonym for fiat-money-illiteracy is not helpful. Yes, most people pushing flat taxes are really pushing for something else but that doesn’t mean we should abandon enquiry into ways of structuring tax.
I would argue that at the moment even progressive thinking about tax has been coopted by the neoliberals. They have defined the battlefield about progressivity in terms of tax rates, where a flat tax has a single rate and a progressive tax system has rates that escalate with, for example, income. Money and of income and wealth are asserted to be the same thing, like a non-physicists’ use of mass, weight and inertia.
We should break free of this paradigm. Pace my discussion with froghole the other day, classical economists distinguished profits and economic rents and the unique role of land as a factor of production that was essentially bounteous and at one point the UK had a system of taxation which divided income into schedules according to its nature: earned income, unearned income, economic rents from land etc.
We need to take the battle back to these categories. We needed to break up money, so that people understand the difference between bank and state money, and income, so they understand the difference between labour and capital income and so on. The quid pro quo for forcing more nuance into the system in terms of the nature of things is to simplify the system in terms of rates and arithmetic.
We do not want a system of ever finer rate ladders applied to a single value-judgment-free concept of income. We want a single, ideological rates applied to different moral categories of income. At its most extreme, zero on earned income and 100% on unearned income.
Rather than resist the flat taxers, we should judo throw them into a classical/Marxist tax structure….
I think we are in wholesome agreement.
What is needed is an entirely new and properly informed consideration of taxation. It must eschew the tired trope of taxation being bad and no-taxation equaling freedom. The truth is more or less the opposite.
It must start with an understanding that taxation is a system of drainage requiring drains to be located where money is pooling (laking?).
It must see private banks as what they are – licensed money creators – with disastrously inadequate regulation.
And it must see our financial sector as parasitic and a cancer on the real economy.
If we can get at some or any of this through the arguments of flat-taxers then by all means.