Jason Soon has lost no time in taking advantage of the Movable Type extended page facility at Catallaxy’s new home. He’s posted a long-ish rant about the benefits (and to some extent the problems) of a flat tax system. I’m inherently sceptical about flat tax, although I certainly agree that the current top marginal rate cuts in at far too low a level. Moreover, I’m attracted to Jason’s argument that a flat tax system would tend to promote political honesty and accountability for taxing decisions:
When people know that to tax their neighbours is to tax themselves, their appetite for larger government and complex taxes will be reduced. The flat tax constraint does not place, nor should it place, any explicit constraint on overall levels of public expenditure. But it knocks out many of the opportunities to spend political capital for partisan gain. Flat taxes stack up well against the two tests for any legal system: the costs of administration are low, and the incentives for responsible political behaviour are great.
However, this quote also contains the germ of the reason for my suspicion. Although there may not be any “explicit” constraint on overall levels of public expenditure, there is a powerful implicit one, namely the very factor that Jason sees as an unalloyed virtue. In fact it’s a two-edged sword. Governments won’t easily be able to create a public impression that the burden of tax increases is going to fall on someone else (i.e. the wealthy who can afford it), because increases will fall equally on everyone.
However, what that would mostly mean in practice is that new or enhanced areas of service and infrastructure, even if they might more sensibly be regarded as public in nature (in that everyone needs them and they’re essential to creating equality of opportunity), will tend to be provided by the private sector because governments won’t practically be able to fund them through increased taxation without running an unacceptable risk of losing the next election. It’s always easier to run a scare campaign against a new taxation measure than to sell its virtues (just ask John Hewson or Paul Keating).
But because the private sector needs to make a profit and inevitably charges on a “user pays” basis, further moves towards private service and infrastructure delivery will inevitably lead to a regressive system and a more and more unequal society where the poor are priced out of access to basic facilities. It wouldn’t even be practically possible for governments to redress the regressive effects of the private sector model by devices like a voucher system for poorer students to access education: the likely electoral consequences of the tax increases (or spending cuts in other areas) necessary to fund it would make this a ‘courageous’ choice in a Sir Humphrey Appleby sense.
I agree with Jason that we need a system where governments are more directly accountable in a political sense for their taxing and spending decisions. But I think it would be best achieved by sticking with progressive income tax rates but inflation-indexing the marginal rate thresholds, so that at least taxation can’t be increased by stealth/masterful inactivity.
There’s a lot more to say about flat versus progressive income tax systems. Unfortunately I have neither the time nor the expertise to debate the arguments coherently. With a bit of luck someone with greater knowledge in this area, like John Quiggin, Tim Dunlop or Christopher Sheil, will take up the challenge of advocating the virtues of progressive taxation.