That an article has appeared in the Daily Mail today claiming that flat taxes would help the poor should come as no surprise. That it is based on a piece of original research by the Joseph Rowntree Foundation however ought to raise at least the odd eyebrow.
In fact, man-bites-dog spin from the JRF notwithstanding, the flat tax is only half the story. What the JRF are also proposing is the creation of a negative income tax system to replace the extremely complicated existing system of tax credits. That sounds more like the bunch of Quakers we know.
Personally, of course, I would go further: most countries worldwide that have flat income tax rates also have significantly higher property taxes. By introducing these (LVT to be specific) at the same time you could significantly reduce the base income tax rate while capturing more wealth from the better off in a more economically efficient manner. But I’m repeating myself.
Of course, that sounds rather like what Milton Friedman suggested in the 60s…
Flat tax with a value below which you start ‘paying’ a negative income tax, gradiated in such a way that when you earn more, you receive less, but get more money than otherwise to encourage people to seek higher wages.
The current welfare system creates disincentives to work- if you take on some small amount of work you may loose your benefits leaving you worse off.
What Tristan said about the benefits trap. Big time here in Oxford. A friend and I worked out that if you were on housing benefit in a one bedroomed private rented property of the meanest type (you won’t get council housing for a single in a decade) you potentially have to earn something like £15k to be able to start earning for yourself without having a higher effective marginal tax rate. And in Oxford £16.5k is the median earnings!
Which is a good reason to support the increase in the threshold below which no tax is payable – up to around £7,200 under today’s proposals, compared with about £5,000 now. That alone takles 2m of the lowest paid out of tax altogether. Not vast sums of money, but a big impact on reducing marginal rates of tax/lost benefits.
A question on LTV:
As I understand it LTV is a tax on the undeveloped value of land. Does it also take into account demand for land in the particular vicinity concerned. ie would the base for taxation in London be different to the value in the Scottish Highlands?
Dominic: I’m not opposed to increasing the threshold and have never said anything to imply that I am – quite the opposite.
Bishop Hill: absolutely, yes. Land values, ultimately, are contingent on external factors (location, location, location) and planning permission. So a thousand acres of highland scrub would be worth a pittance compared to a fashionable part of the City and would be taxed accordingly.