(Patrick Minford)
The actual paper is available here.
The existing tax system is uncompetitive for the economy. It benefits only those who are in median income level. It punishes those who earn above average and, at times, may be quite high for those who earn below average.
E.g.: High earners are taxed at excessive rate and this will eventually push them to go a more tax-competitive country. It is also a “punishment” for earning money. On the other end of the spectrum, even the low-earners are taxed too.
A flat tax system will be equal across society but with a much higher threshold (i.e. the minimum amount that you have to earn before being taxed). This is much fairer.
Patrick believes that taxation should be on consumption rather than on income. (I did not take detailed notes on this issue as I do not see it ever happening)
The reasons we have incremental tax rates are:
- strong lobby from interest groups (mainly re-distributionists)
- median-level earners forms the vast majority of voters. The best way to get their vote is to promise not to tax them too highly. In other words, tax anybody else at whatever rates, but never tax the median-level earners more than they would agree.
Flat tax rate would create economic growth.
Flat tax would also benefit from the Laffer effect. (Anak Alam, if you want to know more about the Laffer Effect, ask Abidin. He understands it better than me, I think)
The flat rate must not be high. A suggested figure is around 20% with a view to reducing it down to around 13%.
A good flat taxation system would focus on maximizing the benefits from growth and Laffer effect.
Flat tax, despite it being a much better system for the economy and for the public as a whole, is also politically unpopular. The way forward is educating the public.
Question to self: At only 2.5%, zakat is low and is flat. Isn’t that intriguing?
Filed under: Freedom & Liberty
No, actually it might be better if you summarise for the benefit of readers like me who is not too much into all these things but still have an ounce of interest in it.
Entry changed as requested.
Wouldn’t it be problematic on where to draw the threshold line? I mean the controversy for people on the border line – those slightly above get taxed, those slightly below are off the hook. When all want to be let off the hook, it creates a slippery slope – eventually the threshold is significantly artificiallly lowered.
Of course there is a need for detailed discussions on where to set the threshold. But this is possible.
If it was possible to set a threshold for the existing incremental system, it is also possible to set one for the flat taxation system.