I am very much in favour of a flat rate income tax rather
than the 'progressive' variety we have today because the present sort
encourages all sorts of corrupt practices -- being paid offshore,
receiving perks in lieu of salaries, being paid in share options and so
on. The steeper the tax rate, the more that evasion and avoidance is
encouraged. Also, the extraordinarily high salaries that progressive
taxation produces encourages status competition between the chief
executives of similar size companies -- against the interests of the
shareholders -- and envy and frustration among middle management and
ordinary employees. Right-wingers taunt left-wingers by saying
"Socialism is the politics of envy". Well, there is nothing
wrong with envy in principle. Within reasonable limits it is entirely
natural and motivational. It is the huge differentials between the
highest salary bands and the lowest which is socially destructive.
However, I would like to dispense with income tax altogether and have a
sales tax instead. A sales-based tax with higher bands for the
higher-priced goods would be progressive in a positive way and would be
an attractive way of loading tax onto the rich because the higher priced
goods would be either positional goods or status goods. Positional goods,
as originally defined by Fred Hirsch, are those which only the better-off
can afford to buy --diamonds, Impressionist paintings and grand houses,
etc -- that is, those goods that are rare and always will be in short
supply and which therefore carry high social status. A high rate of tax,
while it would not be welcomed, would certainly add to the social
satisfaction of being able to afford them because lesser folk would be
excluded.
Status goods as I define them -- that is, goods which are high-priced to
start with but which are subsequently capable of being mass produced so
that they become steadily cheaper over time -- can also be highly taxed,
though not so highly as positional goods, I suggest.
As a rough stab I would suggest that a sales tax could be in five bands.
The topmost band would carry a high percentage tax in the case of
positional goods -- those that automatically carry a high price tab
anyway. The second band would be for status goods when they first appear.
In the case of a brand-new product, the manufacturer can simply be asked
what classification he wishes to place it in. There would be no cheating
because the percentage tax applied would shift the good firmly one way or
the another. This would also obviate what is a corrupt practice on the
part of those manufacturers of high-priced branded goods who want the
best of both worlds -- who want to make it seem as if they are producing
exclusive goods (positional goods) but yet quietly enlarge their markets
and produce quite high quantities. In practice, such attempts at false
positional goods only encourages counterfeit goods which, in due course,
devalues the original good.
The third band could be applied to every type of status good as it is
adjudged to reach a halfway level (precisely what this may ultimately
tuirn out to be doesn't really matter), The fourth band would be for all
status goods that have finally become ordinary consumer goods bought by
almost everybody. The fifth band would be zero-rated -- reserved for
items like food, children's clothing, health products, information, and
educational goods and services.
The present sort of tax system is a mild sort of ideological attempt to
approximate to equality before a consumer has the chance of buying
anything. Such a taxation system never succeeds in doing so because
of corruption but if it were to achieve equality then there would be no
economic growth at all because innovations, necessarily costly to produce
at first, could never be afforded by anyone. In fact, it is inequality
that drives the economic system. It is the demand for high-priced status
goods by the highly-paid which encourages more manufacturers to appear in
the market place with the result that the price becomes cheaper and more
consumers can buy them. We need reasonable inequality, though not the
enhanced sort which is produced by 'progressive' taxation.
A sales-tax would also catch criminals who, at present, largely evade the
system. I recently heard a senior commissioner at Scotland Yard who said
that the police know of about 200 master criminals in England who live in
grand houses and drive expensive cars but have no evidence of how they
obtain their riches. A sales tax on the properties and goods they buy
would at least give the police at least the beginnings of an audit trail
which gives them more chance than they have now of following through to
the source of their wealth.
I recently came across an article of six years ago by Hamish McRae, the
economic editor of the Independent in which he argues very
persuasively for a 'location tax' on the grounds that we are all becoming
more mobile and more able to evade taxes which are mainly based on fixed
employment. However mobile we may become, we still want a place that we
call home. He writes at the end of the article of the need for "a
bedrock of taxation which will remain" which includes "a
reasonable level of sales taxes; fuel and power taxation; and some (maybe
quite modest) level of income tax." However, all of these, except
the last one, would be subsumed in my proposal of a five (or so)-banded
sales tax. I simply see no reason at all for income tax. I think it has
been a blind alley which has been in no-one's interests -- governments or
the governed -- but very much in the interests of the cheat and the
criminal.
Keith Hudson
<<<<
THE NEW PROBLEM THAT IS THOUSANDS OF YEARS OLD
Companies can be a brass plate in Liechtenstein and operate offshore, but
the people who own them have to have a home, and they can be
tracked
Hamish McRae
"And it came to pass in those days that there went out a decree from
Caesar Augustus that all the world should be taxed, and all went to be
taxed, everyone into his own city. And Joseph also went up from
Galilee out of the city of Nazareth into Judea unto the city of David
which is called Bethlehem..." Luke, Chapter 2.
Had it not been for an effort by a supranational authority, concerned
about the difficulties of collecting tax from economic migrants, Joseph
and his pregnant wife would have been able to stay in Nazareth, and the
story of the Nativity would have been rather differcnt.
At the weekend. Mr Jurgen Stark, a finance ministry state secretary
in Germany, said that Bonn was planning a campaign against "tax
havens" in the EU, singling out the UK. It seems that British tax
rates are one of the reasons why investment bankers, including many
Germans, operate from London instead of Frankfurt.
Germany is not proposing that Germans resident in London should have to
return to their native cities to be taxed, though it would be a sight
easier to hop on a plane back to Frankfurt than to trek down from
Nazareth to Bethlehem, half a day's car ride even today. But Germany's
concern is similar to that of Caesar Augustus. If you have a common
currency zone with high levels of labour mobility it is hard to avoid
inefficiencies in the tax system. Two millennia ago the problem was
tracking people; now it is the multiplicity of different tax
regimes. We can, to some extent, fix the old problem; but because
the world is less unified, we have a problem that they did not have to
tackle, the lack of a common tax authority.
In the years ahead this is going to get worse. All high-tax
countries are desperately concerned about economic migration.
Germany is concerned about the loss of jobs to eastern Europe, partly a
function of lower wages, but more one of less onerous social security and
tax payments. I was in Sweden last week, and it was pointed out
that all the high-profile Swedish sports stars lived outside the
country. But at the moment we are only seeing a tiny change, for
only a relatively small group of people are free to choose their
location. As electronic communications develop, and as an
increasing proportion of the world's labour force works on-screen, the
proportion of workers who are free to locate anywhere will rise. We
already have an element of tax competition within the EU, seeking to
attract new business investment with grants and tax breaks. Are we
moving to a world where tax competition extends to individuals and
becomes a major way in which countries compete?
Some people have gone even further than this, and started to ponder
whether the Internet creates a world where companies and people can
locate themselves beyond the bounds of any national authority.
Of course humans have to be physically located somewhere; companies can
be a brass plate in Liechtenstein and havc all their operations offshore,
but the people who own them have to have a home. And they can be
tracked. The advance of electronics, which brings us this freedom
of location also makes it easier for Caesar Augustus to find
us.
But the combination of mobility and electronics is likely to cut away
government revenues over the next generation -- it is the principal force
which seems likely to cause the downsizing of government. To many
this may appear welcome, but there is the disturbing possibility that
governments simply will not have the revenue necessary to perform their
basic functions. This raises two obvious questions. What can
governments do to protect revenue? And is there a bedrock of taxation
which will not disappear, come what may?
On the first, the key element will be the degree of international
cooperation that governments can develop. Within the EU there ought
to be some room for holding tax rates within broad bands, but the scope
will be more limited than people like Mr Stark would like. Quite aside
from the obvious political difficulty of a country accepting a tax rate
decided by voters in another, there is the practical difficulty that
there are several places in western Europe which are not members of the
EU not just Switzerland and Norway, but also places like the Channel
Islands.
In any case the chief competition for the EU countries will not
increasingly be from within the EU, but from outside it. Economic
power is inevitably shifting to East Asia. It is very hard to see a
government in China being particularly sympathetic to charges from Europe
that its taxation policies are unfair. Even if it were possible to
coordinate EU taxation, that would not be enough. Indeed it might
simply put the European time-zone at a disadvantage compared to the other
two zones America and East Asia.
So, while there may be grounds for somc international cooperation on tax,
it would be unwise to expect too much. An alternative way forward would
be that adopted by the United States, which taxes its citizens wherever
they live world-wide. In theory any country concerned about tax
leakage because of its citizens moving abroad could think of doing
that. But in practice it would be very difficult for other
countries, if only because the attractions of being a citizen of almost
any other country are weaker. In the case of Germany there would be
the further complication that nationality is by blood -- by ancestry --
rather than by birth.
The best protection of government revenues, surely, comes on the other
side, the spending side. Countries with very bad public services
are unattractive places for either people or businesses to
locate.
In any case there is surely a bedrock of taxation which will
remain. This includes property taxes; a reasonable level of sales
taxes; fuel and power taxation; some (maybe quite modest) level of income
tax. Even on pessimistic assumptions, a country ought to be able to raise
taxation equivalent to, say, 25 per cent of GDP, at least for another
generation.
But as the demand for skilled people rises and as these people are free
to move around more and more, the downward prcssurc on taxation will
continue. Expect more concern about "unfair" taxation,
and increasing efforts to make people pay tax in their cities of their
lineage, even if future tax authorities will not force people to go back
there to pay it.
Independent -- 24 December 2003
>>>>
Keith Hudson, Bath, England,
<www.evolutionary-economics.org>
