Flat tax: works for Lithuania and Albania, eh?

Written By: - Date published: 1:33 pm, October 13th, 2009 - 34 comments
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Predictably, the ideological vanguardists at Treasury are rolling out the flat tax argument again. For some unknown reason Radio NZ hasn’t published the Treasury papers they obtained under the OIA but the idea this time seems to be to use the money raised from higher GST, capital gains tax, land tax, changes to tax treatment of investment properties, and/or increases to the bottom income levels to pay for eliminating the higher tax rates.

Make no mistake, this is just a wealth grab by the rich from low to middle income New Zealanders. A flat tax would only cut income tax for the rich and would have to be paid for with higher GST for the poor a or higher bottom income tax.

The whole thing is premised on Treasury’s voodoo economic models, which hold that if you take food out of the mouths of a thousand working class children so some rich guy can buy a yacht then somehow you’ll get the incentives right and we’ll all end up with yachts.

It’s patently aburd.

Nearly the only countries that have adopted flat tax are the former communist states, who got suckered into adopting Jeffery Sachs’ ‘cowboy capitalism’ wholesale. Sure they grew alright in immediate the post-communist era, as you would expect with their markets opening to the wealthier West.

But now they’re buggered. The Baltic republics, often held up as shining examples by flat tax advocates are now economic disaster zones because their growth was built on a few wealthy speculators and the bulk of the population remained poor. Estonia’s GDP shrank 16.1% a year last quarter, Latvia’s 17.3%, Lithuania’s 20.4%*. Why would we want to copy them?

The fact of the matter is that every single country that is above us in the oft-cited OECD rankings does not have a flat tax. In fact, many of the most economically successful countries (Norway, Sweden, France, Germany, Australia, the UK etc) have more progressive tax systems with higher top rates than we do.

If we want to be more economically successful, shouldn’t we imitate successful countries rather than basket-cases?

Of course, the Right’s agenda has never really been about making the economy grow faster. It’s all about taking from the poor to line the pockets of the rich, and with the New Zealand Treasury we have a highly ideological and activist proponent of that agenda right at the heart of our Government. That’s something the Left is going to have to sort out next time we’re in power.

34 comments on “Flat tax: works for Lithuania and Albania, eh? ”

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  1. TightyRighty 1
    13 October 2009 at 1:42 pm

    doesn’t hong kong have a flat tax rate? and didn’t they grow by over 3% in the last year? countries that have always been basket case, will likely remain so.

    • Lanthanide 1.1
      13 October 2009 at 1:50 pm

      From wikipedia article on flat tax:

      Countries reputed to have a flat tax
      Hong Kong Some sources claim that Hong Kong has a flat tax,[41] though its salary tax structure has several different rates ranging from 2% to 20% after deductions. Taxes are capped at 16% of gross income, so this rate is applied to upper income returns if taxes would exceed 16% of gross otherwise.[42] Accordingly, Duncan B. Black of Media Matters for America, says “Hong Kong’s ‘flat tax’ is better described as an ‘alternative maximum tax.'” [43] Alan Reynolds of the Cato Institute similarly notes that Hong Kong’s “tax on salaries is not flat but steeply progressive.”[44] Hong Kong has, nevertheless, a flat profit tax regime.

    • snoozer 1.2
      13 October 2009 at 1:50 pm

      so, if we adopt a flat tax rate we’ll be like Hong Kong? A major export/import destination for the world’s largest manufacturing country?

      In fact, if Hong Kong only grew 3% last year, it grew at half the rate of the rest of China. Not a good example, Tighty.

      Oh yeah, and just ignore all the other two dozen or so former communist countries with flat tax and their dismal economic performance

    • The Voice of Reason 1.3
      13 October 2009 at 1:53 pm

      Nope. Graduated from 2% through to 17% for lower through to middle class incomes. Bugger all state support outside of that, hence the low rates. Similar in Singapore, if that was the island nation you were thinking of?

    • Draco T Bastard 1.4
      13 October 2009 at 3:37 pm

      From here.

      Q: Does Poverty really exist in Hong Kong?
      There is an increase in prevalence of low-income households in Hong Kong in the past decade.
      • There were 0.89 million of people living in low-income families in 1995 while there were 1.22
      millions in 2005.
      • Poverty rate has risen from 14.8% in 1995 to 17.7% in 2005.

      That’s the only statistic that’s worth mentioning about how “successful” Hong Kong is.

  2. Lanthanide 2
    13 October 2009 at 1:49 pm

    John Key has already nixed it: http://www.stuff.co.nz/business/industries/2958390/No-flat-tax-PM

    Also, flat tax in the form of flat *marginal* tax rates is probably the best of all worlds, and generally involves a form of negative income tax. We’ve talked about this here before on the standard, for example where the flat tax rate is 33%, but the government also gives everyone $10,000 annually untaxed – if you earn 30k in such a system the tax paid wipes out the government payment, but if you only earnt 10k you’d end up with a final income of 16.6k, or only paying 16.67% tax, and if you earnt 120k you’d end up paying 40k in tax or an effective rate of 25% tax – thus progressively taxing higher income earners more than lower income earners. This also allows a simplification of the welfare system, where benefits are simply an adjustment to the annual government payout, instead of a complex system checking to see how much you earnt in a particular week or month to see if you’re still eligible for the benefit, etc.

    • Draco T Bastard 2.1
      13 October 2009 at 3:42 pm

      I agree with the idea but I suspect that you’ll find that the flat tax rate would be closer to 60% or 70% than 33%.

  3. bobo 3
    13 October 2009 at 2:14 pm

    Why do we need a govt announcement to say they aren’t doing anything in regards to a flat tax? This gov almost has a twitter like mentality , omg say something… to fill an empty policy vacuum. Labour needs to attack them this week on the blatant sabotaging of ACC ,so next year national can say, hey ACC levies are so high compared to private insurance…

  4. roger nome 4
    13 October 2009 at 2:48 pm

    Taxing lower income earners (under $20,000 annually) is just stupid. The amount of tax revenue gained is only a small percentage of total revenue, and these people can’t afford to pay the tax. It just results in more social problems and more crime.

    Lanthanide’s suggestion would probably lead to better economic and social outcomes than the statuesque.

    • snoozer 4.1
      13 October 2009 at 3:08 pm

      status quo? 🙂

      I understand there are some theoretical problems with negative tax, just as there are theoretical benefits.

      .. and it’s not really on the cards anyway.

  5. Mark M 5
    13 October 2009 at 2:50 pm

    How would a flat tax be a wealth grab by the rich from low to middle income New Zealanders. ?

    If you get to keep more of your own money how is that taking from others.

    If the tax rate was 20% and you earned $200,000 you would be contributing $36000 more to running the country than a person who earned $20000.

    This is not about the proportion of income people should pay ,its about portraying people who pay more than others , as somehow flogging money off them.

  6. Greg 6
    13 October 2009 at 2:57 pm

    nome,

    The problem with with having tax exemptions is that it is hugely inefficient. Why not tax everything but have a guaranteed minimum family income or the like?

    Also, I’m curious. What is the moral argument for not having a flat tax? Because a tax system should be fair right? Does it not make sense that you should be taxed for what you use. Now the rich may well use more government goods and services. A person on $50000 may well use half of the goods and services that a person on $100000 would use. But with a flat tax the income tax is already doubled. Are you arguing that someone on $100000 would use even more than double that of someone on $50000?

    • Daveo 6.1
      13 October 2009 at 3:04 pm

      Government isn’t a company that you pay for goods and services. That’s a completely warped neoliberal way of looking at it.

      Tax is about what it costs to run a civilised society, and who’s best positioned to pay for it. We have progressive tax because the wealthy can afford to pay a greater proportion of their income than the poor.

      It’s also a recognition that a capitalist system generates highly unequal social and economic outcomes. A progressive tax helps to mitigate this unfairness, a flat tax makes it worse.

      • Greg 6.1.1
        14 October 2009 at 11:55 am

        So what your saying is that the rich should pay a disproportionate slice of the taxation pie simply because “they can afford to pay a greater proportion of their income”?

        I’m struggling to see the moral argument there……

        • Daveo 6.1.1.1
          14 October 2009 at 12:05 pm

          That’s the practical argument.

          As for the moral argument, like I said:

          It’s also a recognition that a capitalist system generates highly unequal social and economic outcomes. A progressive tax helps to mitigate this unfairness, a flat tax makes it worse.

          Your mistake is to view taxation as impinging on natural, pre-political property rights. As Philosophy, et cetera argues:

          We should instead understand rights – including (conditional) property rights – as emerging out of a social/political context (and justified on indirect utilitarian grounds). On this more holistic view, you cannot see pre-tax income as your “natural” or “deserved” earnings. ‘Pre-tax’ is a misnomer: tax is not an imposition on some prior economic system, it is a fundamental part of the system. A sales tax is simply part of the price of what you buy. Income tax is just a factor that determines your earnings. “Ownership” is not a natural relation between you and an object, but a social relation between fellow citizens: it is an agreement to refrain from interfering with the socially-recognized (i.e. “post-tax”) holdings of each other.

          (http://www.philosophyetc.net/2005/06/why-taxation-is-not-theft.html)

          That’s not to say anything goes. There’s a lot to be gained both on grounds of practicality and fairness in allowing people to be rewarded for their efforts. But there’s nothing immoral in using a redistributive tax system to even out the unfair distribution of wealth created by capitalism.

    • Draco T Bastard 6.2
      13 October 2009 at 3:49 pm

      It won’t be doubled though unless all income is taxed the same way and the only way to do that would be to eliminate all tax deductions.

  7. Irascible 7
    13 October 2009 at 3:49 pm

    Shades of Nosferatu Douglas emerging from the grave again in this proposal fromthe Treasury wonks who must have drunk from the same blood source. I seem to recall Roger advocating such a tax when he was finance minister just before Lange fired him.

    If I remember rightly the proposal created a huge schism inside Labour – a schism that took Roger, Richard and co off to become ACT.

    I doubt if the same ideological schism will happen in the NACT party but the proposal does demonstrate how out of touch Key & co are to even allow such a proposal to emerge on a discussion / policy direction paper.

  8. Danyl Mclauchlan 8
    13 October 2009 at 4:03 pm

    What is the moral argument for not having a flat tax? Because a tax system should be fair right?

    The tax system SHOULD be fair. But the underlying economic system SHOULD also be fair. The problem is that capitalism – although it’s great at creating wealth – is very unfair and causes the new wealth to aggregate. Progressive taxation balances the unfairness out again.

  9. ben 9
    13 October 2009 at 4:05 pm

    Probably the silliest post I’ve seen for a long time, Marty. Let me count the ways:

    1. If it’s just a wealth grab, then why are property taxes set to increase? Isn’t it the wealthy who tend to own property?

    2. The whole thing is premised on Treasury’s voodoo economic models, which hold that if you take food out of the mouths of a thousand working class children so some rich guy can buy a yacht then somehow you’ll get the incentives right and we’ll all end up with yachts.

    The silliest sentence in a very silly post. “Voodoo economics” was invented for Reagan’s policies and that was 25 years ago and remains as meaningless as ever. A useless slogan. The rest of this paragraph is unadulterated straw man tosh.

    3. What does Estonia and Latvia’s flat tax have to do with their response to the economic crisis? About nothing I would say. Do you have any evidence at all that their flat tax made the result worse? Do you have any idea why they have flat taxes? The main answer is because those countries had problems with rampant tax avoidance, and flat taxes substantially increased taxes raised.

    4. And then you say this: Of course, the Right’s agenda has never really been about making the economy grow faster. It’s all about taking from the poor to line the pockets of the rich

    I would say you are exactly wrong about that. Treasury will have had these discussions recognising the argument about how low income people may be affected and decided that in spite of this objection, a flat tax may nevertheless be sensible. Yes I suppose it’s easy to portray the people at Treasury as uncaring monsters who actually think it appropriate to take from the poor and give to the rich for its own sake. But that is simply untrue – that is not an attitude I have ever once seen in all my dealings with Treasury people. They have no reason to think about things that way and they don’t.

    Making things up based on a caricature that was barely believeable in 1987 letalone now adds nothing to the debate. Which about sums up The Standard, really: so little of what you say has any relationship to truth that I doubt anybody believes anything that’s said here – even when quite sensible things are said.

    • felix 9.1
      13 October 2009 at 4:17 pm

      ben.

      You are the caricature.

    • Clarke 9.2
      13 October 2009 at 4:21 pm

      Yes I suppose it’s easy to portray the people at Treasury as uncaring monsters who actually think it appropriate to take from the poor and give to the rich for its own sake. But that is simply untrue that is not an attitude I have ever once seen in all my dealings with Treasury people.

      Having also had quite a few dealings with Treasury people (and ex-Treasury alumni), it’s true what you say about them not being uncaring monsters – they’re regular folk. However they’re also a little … isolated … from the real world, which is part of the caricature that turns out to be deadly accurate, IMHO.

      For instance, if you want to ensure you’re getting the least accurate forecasts on GDP growth, unemployment, international oil prices or a range of other macro-economic indicators, Treasury are your people. They are less accurate than the private sector economists, yet they should be better as they have greater access to the raw data that comes from being part of the inner circle of government. For the money we spend on Treasury-the-agency, we’d be better off putting three or four companies such as NZIER on retainer and then taking the median point of all their projections.

      And frankly, I think Annette King nailed it in the Herald – if John Key shoots down their flat tax paper within 12 hours of it being issued, why are we paying Treasury to generate these things?

    • snoozer 9.3
      13 October 2009 at 4:39 pm

      ben. please show some evidence, any real world evdience that flat tax increases growth.

      Treasury aren’t monsters, they’re ideologues. They’re pushing a political ideology, thinly cloaked in threadbare economic arguments that turn out to have no substance at all. Don’t cry about it when the other side criticises them, it demeans you.

      If you had read the government’s Tax Working Party report you would know that they said the impact of a land tax would be spread across incomes because it would be passed on through rents. A capital gains tax is progressive. And GSt is regressive.

      • modern 9.3.1
        14 October 2009 at 2:05 pm

        Snoozer:

        “If you had read the government’s Tax Working Party report you would know that they said the impact of a land tax would be spread across incomes because it would be passed on through rents.”

        It’s hard to say this any other way…but you just made that up, and it’s completely wrong.

        The Treasury / IRD report to the Tax Working Group on land tax (and there is no other ‘government’ report in existence) did NOT say the impact of a land tax would be spread across incomes because it would be passed on through rents.

        It said the opposite: that (a) it will NOT be passed through in rents; and (b) the full impact of a land tax will be on the people who own land at the time of announcement of the tax.

        http://www.victoria.ac.nz/sacl/cagtr/twg/Publications/3-land-tax-ird_treasury.pdf

    • Draco T Bastard 9.4
      13 October 2009 at 5:37 pm

      “Voodoo economics’ was invented for Reagan’s policies and that was 25 years ago and remains as meaningless as ever. A useless slogan.

      No Ben, it’s spot on. The neo-liberal economics of which you speak so highly really are delusional and, quite simpy, don’t work. That’s why we are having another recession ATM.

  10. George D 10
    13 October 2009 at 4:36 pm

    I might be really really stupid, but if Australia has a five tier tax system with a bottom tax free bracket and top marginal income tax rate of 45%, how is “a flat tax rate [a] way of closing the income gap with Australia.’?

    Nevermind either that of the ten highest earning countries per capita in 2008, 5 have tax systems that are significantly more progressive (Sweden, Denmark, Norway, Austria, Netherlands), one is a tax haven (Luxembourg), one is a rapidly deflating bubble (Ireland), another a busted bubble (Iceland) and two have an economy that New Zealand would be very hard pressed to emulate (UAE and Qatar). Australia, with its significantly higher taxes, sits just outside the top ten. What does that tell us? That there is no correlation between a flat tax and a high income. In fact, high taxes predate the rises in incomes of the high-tax group. Could it be that raising taxes will increase incomes? There’s better real world evidence than that supporting the voodoo economics of Bowen Street.

    Nevermind again that New Zealand’s tax system works out to flat for 90% of us:

    How much fairness is gained for all this extra complexity? Surprisingly little, suggest Messrs Owens and Hamilton. In New Zealand, for example, only the richest tenth of households pay much more under the country’s progressive income tax than they would under a 25% flat tax (see chart on page 71). Most of the redistribution in New Zealand is carried out on the other side of the government’s ledger, by spending more money on poor people.

    (Economist, 16 April 2005)
    That tax collected from the top ten percent is actually rather important, however.

    And finally, I bet they don’t consider compulsory wage arbitration, or strong unions. Those are also important reasons for Australia having some of the highest median wages in the world.

  11. Zaphod Beeblebrox 11
    13 October 2009 at 5:34 pm

    Q: How do you address income and wealth disparities between Oz and NZ?
    A (most people would assume): You first raise productivity by better equipping and training our workforce, then you pay them more so reflect their increased performance. Isn’t that everybody else in the world is trying to do?

    Forcing more people below the poverty line, does not make us any more productive.

    Get rid of these economic dinosaurs

  12. Libertyscott 12
    14 October 2009 at 1:40 am

    The Baltic states have not had economic collapse due to flat tax, that’s a total non-sequiter. They have suffered in part from a property speculation bubble borrowed in Euro whilst their own currencies have suffered in comparison. So the whole basis for this post is empty nonsense.

    The only argument presented here for progressively higher income tax rates is Marxist – the idea that those who earn higher incomes only do so because some others helped them get there, others who haven’t earned their “fair share” and so to compensate them, the state gets money, hires a bunch of them and gives the money directly or indirectly to these poor souls.

    People typically have low incomes either because their parents did not bring them up to have self confidence and belief in themselves and pass on values of hard work and education OR because of a lack of ambition.

    To have a low income you either have employment that pays poorly, because there is a queue of people waiting to take up the job (your skills aren’t that special or highly valued) or you don’t have employment, in which case you have even less valuable skills.

    To argue that those on high incomes, through their own enterprise or the enterprise of those who value their skills (not talking state sector chief executives or any other subsidised jobs) owe people who have surplus skills something is rather absurd. Those people are paid what their skills are worth, if people with such skills are scarce, the price goes up. Unless, of course, you think the poor are all oppressed and exploited, and have no opportunities for social mobility, and are slaves.

  13. Alan Reynolds 13
    14 October 2009 at 6:38 am

    Hong Kong has a flat tax on profits, dividends and rent, but graduated rates on labor income. Those with high salaries pay a flat tax that is lower than the maximum statutory rate in exchange for giving up personal exemptions. High income from capital cannot push people into higher tax brackets regardless of their salary, and high income from work does not raise the tax rate on savings. The whole system is a close as anyone has gotten to what tax economists call an optimal tax.

    Sweden has a nearly-flat tax system, when VAT and payroll taxes are taken into account. That is, everyone who works pays nearly half of income to the national and local governments, but able-bodied people who don’t work are not usually bailed out by welfare. So, Swedes do work, but not too hard or too long.

    If choosing between a progressive tax with a top rate of 17% or a flat tax with a rate twice as high, few economists or citizens would pick the latter. The key issue is the marginal tax rate on labor and capital.

    To blame any country’s recession on its tax regime is just strange, unless there was a big tax increase (like the U.S. in June 1932). Sweden had a much deeper recession than the U.S. last year, but that was not because their tax system is more progressive (it isn’t). Taxes look progressive on paper in Japan and France, but high rates are widely evaded by tax-free perks and the like. Income tax receipts in such countries are very weak.

    Over the longer run, countries (and U.S. states) with lower marginal tax rates invariably have faster growing economies than those with higher tax rates. That is why nearly every Asian country including India has cut its top tax rate in half since the early 1980s — emulating Hong Kong.

  14. randal 14
    14 October 2009 at 10:34 am

    right on marty. it is not about making the economy grow. nobody in New Zealand really knows how to do that no matter how much they scream and shout about it. every economist knows that over time the rate of profit always tends toward zero so in the interim sieze power by a concerted campaign to oust the other lot then snatch as much as you can before you get tossed out again. meanwhile the poor are taxed to the point where they cannot afford to go to bali fora holiday or afford a second hand jap crapper and the fat exhaust modification for their pimply faced son.

  15. roger nome 15
    14 October 2009 at 1:25 pm

    Hey Ayn Rand/Liberty Scott – the flat tax is the tool of the Shaman and the Attila rolled into one. If Atlas were to shrug and clench his buttocks tight enough, you would be the sycophantic butt-sucking flea falling out of his crevasse.

    Now go read some Rawls and think about why your market utopia shit is bunk.

    http://en.wikipedia.org/wiki/Original_position

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