explanation has been the hegemony of ideas that the Washington Consensus
represents. That consensus opposes progressive taxation: it is its opposition
to the idea that has closed down debate on this and other issues of tax policy.
My, that’s just astonishing. For given that absolutely every country has a progressive income tax system (yes, a flat tax with a personal allowance is progressive, people face rising average tax rates) either the claim is Ritchiebollocks or the Washington Consensus is pretty feeble. As Ritchie goes on to quote:
The term ‘the Washington Consensus’ was created by the economist John
Williamson to describe the policy measures that developing countries were
required to implement in exchange for development assistance from the
Washington DC based International Monetary Fund and World Bank. Those
policies were considered by Williamson to be ten in number¹, not all of which
related to taxation². As Williamson himself noted with regard to tax³:
Tax reform involves broadening the tax base and cutting marginal tax rates. The
aim is to sharpen incentives and improve horizontal equity without lowering
Oh, the Washington Consensus is not against progressive taxation. So, it’s Ritchiebollocks then.
Then we get a pretty graph showing that indirect taxation has risen as a percentage of the tax take. And yes, it has. But we’re told it’s as a result of the Washington Consensus. Erm, no. It’s from joining the EU and having to have a VAT. Not something Ritchie bothers to mention of course.
There has been another shift that is harder to detect within the tax system,
but which has nonetheless been present. Although looking at raw data
suggests that the amount of corporation tax paid has been broadly static over
the last decade or so, this does not reflect a substantial net increase in the
number of companies operating in the UK economy or the net increase in
their share of GDP.
Erm but as here. Corporate operating surplus as percentage of GDP has not risen in the last 30 years. Actually, it’s lower than it has been for almost al of that time.
The effective tax rates of large corporations are falling. As a result of these
combined shifts from direct to indirect taxes and because of the fall in
corporate taxes, the UK tax system is clearly regressive.
Ritchiebollocks. More regressive than it was, less progressive than it was (which partially depends upon how regressive VAT is, what with food etc not so taxed and corporate profits taxation is pretty much as it was) I’ll grant.
Whether it is regressive or progressive as a whole is another matter. As it happens, almost all tax systems everywhere are regressive: yes, even bloody Sweden. The UK tax system is less regressive than many: amazingly, the US system is one of the most progressive: precisely because they do not have that VAT.
The Washington Consensus era has seen a marked increase in inequality in
That’s globalisation for you: higher in country inequality, lower global inequality.
This bit is just stunning:
As is obvious, income and current spending were very closely aligned from
1997 to 2007. The crash of 2008 forced them out of step, and as is obvious, it
was not spending that went wrong; it was a lack of income that gave rise to
the borrowing that the government has undertaken from 2008 onwards.
The tax gap
That lack of income was, of course, missing tax. In no small part that was due
to the existence of the ‘tax gap’. This phenomenon – which is the difference
between the tax the government should be paid in a year if all taxpayers
settled their liabilities owing in accordance with H M Revenue & Customs’
interpretation of tax law and the actual amount collected in practice – is
Apparently there was no tax dodging 1997 to 2007 and we all started dodging £120 billion of taxes in 2008.
Nothing at all at all to do with a slump in the economy, a shrinkage of the GDP that could be taxed. Nothing at all at all….
Finally, they can consume to excess, which is a state only possible with regard
to material goods (we can’t over-consume our intellect, for example
Snigger: over-consume perhaps not but I can think of at least one person who is over-extending it.
These four states clearly suggest that that there is a case for progressive
taxation. It is obviously true that no tax should be due when a person is in
Excellent, os, given that the minimum wage is that level, so we are told, of absolute need, therefore the allowance should be raised to £11,800 a year. Good oh!
According to H M Revenue &
Customs²⁶ a person with income of £10,000 in 2009-10 tax year is likely to
have £585 of investment income included in that sum. A person earning
£500,000 is likely to have £151,000 included in that sum and a person earning
£1,000,000 plus will have an average of £689,000 of investment income. In
that case – using the broad economic definition of rent – it is likely that rents
comprise a significant part of the income of those with the highest earnings
but that they do not of those with low earnings.
It is important to remember that rents are in market based economic theory
a sign of market imperfection that allows a person to charge a price above
that which a perfect market would charge and as such rents fall within the
category of activity needing to be taxed to correct market imperfections due
to externalities that the market is unable by itself to properly price.
Erm, rent does not equal investment income. Nor is rent equal to returns to capital nor is it equal to interest or unearned income.
So this is Ritchiebollocks as well.
The result is that a higher rate of tax is logically due either on investment
income, where most (but not all cases, senior executive pay being an
exception) of those rents are likely to be found or, to cover the exceptions,
on high incomes in general. The latter seems likely to be more equitable and
therefore progressive taxation is appropriate for higher levels of income.
Higher rate of tax on investment income? Now the Murphmeister is disagreeing with every economist who ever studies taxation ever (hyperbole alert).
There is an obvious answer to this: to discourage saving in such periods the
rate of tax has to increase and since those with most savings income are the
well off this implies it is their rate of tax alone that should increase. The result
is a need for more progressive taxation in an economic downturn to
encourage savings to be spent.
Snigger. Someone please go and check Keynes’ grave for signs of revolution. We want to raise taxes in a recession in order to counter a lack of aggregate demand. Blimey….
This argument is made time and again, not least by the current Coalition
government who have for the first time included Laffer curve³⁰ arguments in
Treasury reports³¹. The argument, in summary, is that as tax rates increase
the work rate of those with high earnings reduces as they substitute labour
for taxed work so that the overall tax yield falls.
What does that even mean?
Substitute leisure for paid labour maybe?
Then he ignores the paper that shows that 54% (including employers’ NI!) is in fact the peak of the Laffer Curve. Which makes the UK income tax rate peak….erm, 45%.
Higher tax rates aren’t anything to worry about because:
First of all, as has already been noted, a significant part of the income of the
richest in society is unearned. This is not impacted at all by work incentive
rates. Yield on this will not be reduced as a result.
Second, as Piketty, Saez and Stantcheva note, it is much more likely that
these people will negotiate pay rises and so take an increasing share of
national income (as has been seen for more than 30 years) than reduce
But, umm, we’ve just been told that the last 30 years has seen an unprecedented lowering of the tax rates on high incomes. At which point people ave been negotiating pay rises and taking a rising share of national income.
So, lowering taxes causes this behaviour and also raising taxes causes the same behaviour?
And it’s not your property until you’ve paid the taxes on it either. That’s his claim. So if someone mugs you for the £100 you’ve made illegally cleaning windows that’s not a crime but if you’ve paid your income tax on the contents of your wallet it is.
At which point I think we can offer Mr, Murphy a hearty Pressdram v. Arkell, don’t you think?
That consensus is under challenge now. The Tax Justice Network, my own
work, the work of the TUC and PCS on taxation issues,
Actually, that’s Ritchie, Ritchie, Ritchie and erm, Ritchie.
One question: who paid for this paper? Doubt Ritchie’s going to write 50 pages for nowt….unless he really is gunning for that peerage?