The flip side of progressiveness

Posted by Christie Malry on April 29, 2012 at 10:08 pm

It makes no sense at all – and reveals a belief by many that the wealthy count for more – that their hypothecation of government funding to charity carries more pro rata worth than the giving of basic rate taxpayers and those who do not pay tax at all

Erm, if you want a progressive tax system, and we know Ritchie does, and if you  have a tax system that encourages charitable giving by allowing donations out of pre-tax income, as we do, then it's a necessary condition of mathematics that you will forego more tax when a rich person donates than when a poor person donates. It's simply not the case that the wealthy count for more, other than in the sense that they count for more tax receipts. Even after their charitable donations, their net tax payments will still be higher than the vast majority of the population.

And if it really "makes no sense at all", then that's probably because Ritchie is an idiot. People who don't pay tax at all can hardly expect a bigger tax concession than those who pay 45% of their income in tax, can they? They get less because they make such a little contribution to the Treasury in the first place. It really isn't that hard. And it is, after all, merely the flip side of a tax system which, by design, taxes the poorest less and the richest more.

The problem with progressiveness

Posted by Christie Malry on March 14, 2012 at 10:24 am

Perhaps the most deleterious concept of Labour's feckless 13 years of power was "progressiveness". Broadly speaking, a policy is progressive if its benefits impact the poor more than the rich and its costs impact the rich more than the poor.

However, rather than being a good guiding principle, a rule of thumb, it became an all-consuming dogma. Even now, as Labour have been rejected by voters, progressiveness is still an important concept, because it's used by Labour in opposition as a stick with which to beat the government. We saw this at the emergency Budget in June 2010, which was criticised because the totality of the tax and benefits system was deemed to be less progressive after the Budget than it had been before it.  Even though, the richer you get the more tax you pay and the less benefits you receive, it progressiveness was still used by the Opposition to rubbish the government's proposals.

This is bad on public interest grounds. Firstly, measures of progressiveness are only as good as the experts who measure them.  People tend to cherry pick the statistics that suit them best. So, if the measurement of poverty misses out something like, say, access to Council Housing (which richer folk can't get), it may understate the actual progressiveness of a suite of policies. Other benefits, such as free dental care or prescriptions are similarly overlooked. Even worse, someone about to retire has a massive asset in their state pension accrual. But, again, this isn't recognised as an asset, while any private saving held by the rich is. Readers may recognise this as a form of Worstall's fallacy.

Secondly, the ratchet effect of having to be permanently progressive ultimately causes significant problems. The "most" progressive tax system would be one in which rich people pay 100% of tax and poor people pay none. Indeed, a cruel country in which rich people must hand over 100% of their income such that their slightly poorer brethren can pay none is more progressive than one in which the very rich are allowed to retain more of their income.

This failure to account properly leads to bad outcomes. In a system that purports to increase fairness, it can actually undermine fairness, as assets are redistributed from those with limited means to those who actually have more. It can lead to punitive rates of tax on the rich, which can stifle entrepreneurship and discourage investment. And it delays much-needed change to correct flaws in benefit systems. This is particularly difficult when trying to reduce the extraordinary marginal effective rates between benefit withdrawal and taxation.

You can hear echoes of this problem when commentators like Richard Murphy compare the benefits cap to the amount of pensions tax relief that can be reclaimed by 50% taxpayers. We need the ability to make the system fairer in the main. Sometimes this may mean increasing a tax or withdrawing a benefit in a "regressive" way. Fairness cannot be reduced to this silly, mechanistic approach in which no amendment can itself be regressive. It's time to consign this abuse of progressiveness/regressiveness to history.

Mansion tax balls

Posted by Christie Malry on March 8, 2012 at 1:00 pm

Ritchie on the mansion tax:

Is the mansion tax an answer to the 50p debate, therefore? No, of course it’s not. We need that 50p tax rate to create a progressive tax system.

Just as we need a land value tax.

And a local income tax one day, maybe.

A proper wealth tax should also be on the agenda.

Ugh. What an undisguised load of old Ritchiebollocks.

We already have a deeply progressive tax system. Once you layer the benefits system on top, it's even more steeply progressive.

To pretend that we need 50% income tax plus the other things on his list to make the tax system progressive is totally deceitful.

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Regressiveness and sin taxes

Posted by Christie Malry on February 15, 2012 at 10:12 am

A line at the bottom of an article on the regressiveness (or not) of the personal allowance gets me wondering: why does the rhetoric of regressiveness/progressiveness fly out of the window when government talks about sin taxes?

Regressiveness is a four letter word when it comes to taxation. A tax is said to be regressive if its cost, as a proportion of income, falls more heavily on those with lower incomes than those with higher incomes. Conversely, a tax which according to that definition falls more heavily on the rich is said to be progressive.

You can also apply these definitions to benefits, and even to policies which change how benefits will be allocated. Progressive policies good, regressive policies bad.

So what are we to make of today's rumours of a crackdown on alcoholism? Government is proposing, yet again, to hike duties on alcohol to make it more expensive. Because a higher price ought to mean lower consumption. Won't increased duties fall more heavily on the poor, thereby falling foul of our creed of progressiveness?

OK. There are some problems with assessing the progressiveness of taxes which are consumption-based (such as alcohol and tobacco duties), rather than income-based. I showed that in the context of VAT here. But, given the central role that the issue has taken in policy-making and political debate, shouldn't the government at least be addressing the point?

If it concludes that it can set progressiveness aside in this area, why allow it such prominence in discussion of other policies?

The tax paid by billionaires and secretaries: the view from the UK

Posted by Christie Malry on September 26, 2011 at 9:31 pm

Krugman points us towards a table that, in his view, proves that quite a lot of billionaires do pay a lower rate of tax than their secretaries.

And we’re not talking about one or two exceptional guys, either. Look at the IRS data on returns for the 400 highest incomes in America (pdf) — specifically, Table 43. If you look at the numbers since 2004, you’ll see that in a typical year between 30 and 40 percent of those super-high-income players paid an average tax rate of less than 15 percent; most of them paid less than 20 percent. Bear in mind that for the very wealthy the payroll tax — the main burden on working-class Americans — is trivial, because of the cap on Social Security and the fact that it only applies to earned income. And what becomes clear is that the Obama/Buffet claim is absolutely, totally true.

It may be true to Krugman in America, but it's definitely not true in the UK, no matter what tax campaigners would have you believe. And we know this because of a very helpful publication produced by the Office for National Statistics called The effects of taxes and benefits on household income. Table 14 of this document shows, by decile, incomes and direct and indirect tax payments, so you can work out for yourself whether the UK tax system is progressive 1.

At first glance, the figures are mixed. The poorest decile pays direct taxes of £1,113 on total income (including benefits) of £9,275, an effective rate of 12.0%, whereas the richest decile pays direct taxes at an effective rate of  25.3% 2. However, when you add in indirect taxes, the poorest decile pay total tax at a rate of 43.3% 3 compared to the richest decile's 33.6% 4. So, on a total tax basis, there's an argument to be made that the poorest decile pays a higher tax rate than the richest decile.

It's a weak case - when most people talk about tax rate, they mean income tax, not all the other forms of tax. Remember, indirect taxes include all sorts of sin taxes such as gambling taxes and tobacco/alcohol duties. These will obviously be regressive on the poor, but the case for them not being so is very weak.

However, there is another major problem with the tax campaigners' case. And that's the benefits system. You see, a massive slug of the poorest decile's income derives from the benefit system. Where do benefits come from? That's right - from other taxpayers. So when calculating the effective tax rate, we have to eliminate cash benefits, otherwise we don't get a true picture.

Once we remove cash benefits, we get the following picture:

So we can see that the poorest decile's income of £9,275 comprises £5,388 benefits and £3,887 of income. The cruel state then takes £1,113 of income tax from this income, at an effective rate of 28.6% (again, this is higher than the effective direct tax rate on earned income for the richest decile of 25.7% 5. However, on a net basis, the state in fact gives the poorest decile £1,369. For each of the four poorest deciles, the state gives them more benefits than it takes back in direct and indirect taxes. It's only the richest 60% that are net taxpayers, the rest are tax spenders.

Looking at the figures this way, it's clearly total nonsense to describe this as a situation where the rich pay a lower rate of tax than the poor: the poor don't pay tax, they spend it.

Notes:

  1. You may access a Google spreadsheet of these data here.
  2. £25,719 / £101,808
  3. £4,019 / £9,275
  4. £34,161 / £101,808
  5. £25,719 / £100,155

Is VAT progressive or regressive?

Posted by Christie Malry on July 13, 2010 at 10:44 am

Ritchie, busy little beaver that he is, has issued another policy paper, this time on VAT.  The title of Is VAT regressive and if so why does the IFS deny it? alone should leave you little doubt as to where Ritchie lies on the issue.  Needless to say, he's wrong.

His conclusion that VAT is regressive is largely based on his observation that, on an analysis of VAT paid as a proportion of income by quintile, the poorest quintile pays 12.1% of their income in VAT whereas the richest quintile pays 5.9%.  This is a slam-dunk, right?

Wrong.  The Office for National Statistics paper from which he draws these statistics 1 takes great pains to stress that it is not always valid to compare VAT to gross income:

Carrera (2010) 2 presented some of the most common alternative methods that were used to fund expenditure in households where their expenditure was at least twice the level of their disposable income. For these households the most common source of funds was savings, followed by credit/store cards and then loans. This may be due to a number of reasons. For example, the bottom decile in particular includes some groups who have, or report, very little income (for example people not currently in employment and some self-employed people). For some people this spell of very low income may only be temporary and, during this period, they may continue with previous patterns of spending. Secondly, some types of one-off receipts are not included as income in this analysis, for example, inheritance and severance payments. Finally, the income and expenditure data are measured in different ways in the LCF, and either could be affected by measurement errors of different kinds (see Appendix 2, paragraph 6).

Carrera is even blunter.  She concedes Ritchie's point, noting that "indirect taxes are progressive in expenditure distribution, but regressive in income distribution."

However, Ritchie's point is invalid, because it presumes that individuals have the whole of their gross income at their disposal.  In fact, as a direct result of our progressive direct taxation system, richer people must pay a greater share of their income as tax than poorer people.  From the ONS figures for 2008-09, we learn that the top quintile pays 24.7% of their income in direct taxes, whereas the bottom quintile pays only 11.3% 3.  This means that the top quintile has only 75.3% 4 available to spend on indirect taxes, whereas the bottom quintile has a much greater 88.7% 5.  Much more valid, and as identified in the ONS document, is to look at VAT as a proportion of disposable income and of expenditure.  This produces results that are, basically, progressive - at 7% of expenditure 6.

Yep, that's all in the ONS paper.  You see, you might have got the impression from reading Ritchie's briefing paper that the idea that VAT is progressive is all a wicked plot from the evil Institute for Fiscal Studies.  Yet, every single analysis in the IFS paper has a direct parallel in the article by the ONS.

The ONS paper, as highlighted above, also serves to rebut an entire section in Ritchie's paper entitled "Do the poorest really have savings?" 7  Carrera's paper draws upon the Living Costs and Food Survey, which asks households about their sources of income.  Savings are identified as a source within that survey 8.  So, again, his criticism of the IFS is ill-founded and, in any case, should be directed at the ONS.

Notes:

  1. Murphy refers throughout to the 2007-08 version, although the figures for 2008-09 are also available from the ONS website here
  2. Carrera S (2010) ‘An expenditure-based analysis of the redistribution of household income’ Economic & Labour Market Review, Vol 4, No. 3, March, Office for National Statistics.
  3. The effects of taxes and benefits on household income, 2008/09, Table 8
  4. 100.0 - 24.7
  5. 100.0 - 11.3
  6. The effects of taxes and benefits on household income, 2008/09, Table 9(b)
  7. Chapter 7
  8. Carrera(2010),p.21 and footnote 6