06 February 2014

IFS says tax base is too dependent on rich few, but real problem is inequality

In Thomas Piketty's new book "Capitalism in the 21st century", he argues that the rise in inequality is inescapable and will reach double the present levels.

In 30 years the top 1% have gone from owning 13% of total wealth to 30%. In the next 30 years this could reach 60%.

A new IFS report says the UK income tax base is unstable because it depends too much on just 300,000 people - the richest 1% contributing 30% of revenue.

But tax rates on the rich have actually fallen and rates on the poor have risen. Without reducing the total tax take overall, rising inequality means this concentration of revenue collection on the rich few is inevitable and cutting tax and spending which by nature tends to be redistributive will only accelerate inequality. We are stuck in a self fulfilling catch 22 that is very convenient for the Right.

The IFS also criticise the government for reducing the overall tax base by pushing up the income tax threshold to £10,000.

Yet this has been the one piece of good news for below living wage earners. Yes I know it is a poorly targeted way of helping low earners, but at least it was a pro "make work pay" policy and continuing to heavily tax subsistence level incomes makes no social sense.

So what is the solution and can we be more optimistic about inequality than Piketty argues?

The free movement of capital around the globe is increasingly defeating tax collection at national level and favourable tax policies and other "big corp" legislation are bought cheaply from our weak political systems. This is the main thrust of Piketty's pessimistic view - (although two world wars depleting the wealthy's assets temporarily turned the tide).

Piketty argues that nation states can only hold back the rising tide of inequality in the short term because the wealthy can move capital around the globe and continually play one nation off against another. So the only hope to combat this are supranational organisations like the EU.

It is ironic that those wealthy few who control the financial markets argue against the EU's single currency on the basis that social justice & economic efficiency in the Eurozone require significant fiscal cooperation between nations. Yet this equally applies to free movement of global capital or free trade agreements, yet the EU is the only organisation with a significant supranational structure to tackle this problem (inadequate though those structures may be).

On the tax base issue, the IFS argues correctly that increasing the National Insurance threshold is a better way of helping low earners than the Income Tax threshold (though this doesn't expand the tax base).

It seems to me that if we are hamstrung and unable to use taxes to reduce inequality, then Miliband's idea of "predistribution" is even more pertinant. Politically useful in an era of austerity ideology where tax and spend are anathema, Miliband could smash monopolies and regulate prices and wages to redistribute wealth. The wealthy will of course spend heavily to vilify this approach.

Personally, I still think a radical overhaul of tax & benefits are required to make a real difference - the government currently spend £720bn a year. I would scrap all spending bar the £130bn on health, £30bn on social care, £90bn on education, £30bn on justice, £30bn transport & £50bn debt interest. I would allow £50bn more for infrastructure and miscellaneous. This leaves £310bn to pay every worker, pensioner, disabled & unemployed person cash of £6,900pa each. Extra revenue could be raised by scrapping all tax allowances (raises £90bn) which would increase payment to £8,900pa (£740 per month).

This would extend the tax base to all workers, as all earnings would be subject to tax and NI. It would provide a subsistence amount to every adult to live and because there is no means testing remove all admin costs and it would encourage work as there would be no benefit loss to taking work. Very few would not want to supplement a subsistence amount by working. Those people generally are on benefits already anyway. The incentives would now be clear, every pound you earn would make you better off.

I would also look to build housing for profit to pay down the national debt by buying cheap agricultural land (£8k an acre), then grant planning permission thus turning it into £1m per acre overnight. Then build houses & infrastructure with the revenue and sell for big profit. Just 0.5m acres (0.4% of UK's 60m acres) would provide ample space for 4m new homes. Land profit from granting planning permission could generate £400bn in revenue for infrastructure, house building and paying down national debt. I think thats a better option than trying to pay off a £1.2trn national debt by hitting the poorest 10% of people who only have assets of £8bn. The assets of the richest 10% are £4000bn.

Time we had a proper debate on this rather than the poor excuse for a debate we get in our corporate owned (& government bullied publicly owned) media.

1 comment:

  1. Well hooray for Citizen's Income, but why no mention of LVT? It's not "wealth" as such which is so unevenly distributed (i.e. so concentrated in the hands of a few), it is quite particularly land, which is two-thirds of all so-called "wealth" anyway.