Sunday, 28 December 2014

Summary: Hourly Averaging to assist the less economically fortunate

In some of my recent blogs I have compared hourly averaging to other policies designed to assist the less economically fortunate.

My conclusion was that hourly averaging promises a much more effective means of helping the least well-off than a universal/guaranteed/basic income, a high ‘living’ minimum wage, or alternative earning subsidy proposals.

One reason for this is that lifetime hourly average income is a much better indicator of economic fortune than a snapshot at a particular moment of time or year. This is good for the worst off as it means fewer resources are spent on those who are less needy.

The second reason is that hourly averaging is calculated using the amount of time people have worked. By providing people with an incentive to work more hours, hourly averaging encourages economic activity despite its highly redistributive nature.

Encouraging economic activity is good for the worst off for two reasons. The first is that economic growth is generally good for all workers as it creates opportunities. Some alternative proposals, such as a very high minimum wage, are instead likely to reduce opportunities by taking opportunities away.

The exception to the rule that economic growth benefits the worst off is the case where some are excluded from these benefits. Fortunately for hourly averaging this will not be a problem as the systems provides the largest sustainable subsidy available to low earners. The worst off will have more money to spend and/or often more time in which to spend it.

The second reason that the worst off benefit from a strong economy is that they will it will provide more goods and services and at cheaper prices. Other proposals to improve the situation for the worst off will be more likely to cause price rises than would hourly averaging.

These summarise the points I have made in my previous blogposts in favour of hourly averaging; these are the basic reasons to prefer hourly averaging to alternative redistributive policy proposals. My arguments are entirely theoretical, and would need to be tested. However, I have explained the theoretical reasons which suggest that such tests are necessary.

Hourly averaging offers the best prospects for those who do not benefit very much from the capitalist economy, who are treated unjustly as long as greater steps are not taken to make that system fairer.

Wednesday, 3 December 2014

On Earning Subsidies (Part 3) Why is hourly averaging a better than alternative forms of earning subsidy?

There are several types of earning subsidy and I will explain why using my hourly averaging tax proposal as an earning subsidy scheme is much more effective than rival approaches. I will start out by expressing some concerns with existing subsidy schemes, and then highlight why hourly subsidies are more effective. Then I will explain why hourly averaging would be more effective than Edmund Phelps’ alternative hour-based proposal.

Earning subsidy schemes that are based solely on earned income, such as the US system, may encourage people to work fewer hours than they might otherwise. To counteract this, the policy tends to be focused on those with children, and with limited generosity to discourage people from reducing their paid employment. The policy therefore offers little assistance to people without children who work very long hours for low wages.

If it were more generous, in a way that would make a really significant difference to the lives of low-paid people, then it might induce people to work fewer hours as a result. Some people with higher earnings but a desire for more leisure could switch to part-time employment where the subsidy would make up for some of their lost income. These people would consider the remaining reduction their income to be worthwhile given the additional leisure they would obtain, though they would not have done without the subsidy. This would mean that some of the resources in the scheme will be assisting relatively fortunate people in order to enable them to work less. This reduces the resources available to assist others (or increases the expense of the scheme).

One way to increase the generosity of earning subsidies without encouraging people to take more leisure is to add a requirement for the adults in a family to work a certain number of hours each week in order to qualify for the scheme. This is the approach taken with working tax credits in the UK, where people are required to work either 16, 24, or 30 hours in order to qualify (depending on the number of adults and children in the household).

The problem with this approach is that the threshold is going to be somewhat arbitrarily set and will not be suitable for many people. Some people who we would want to assist will not meet the threshold and therefore miss out. The main point is that the threshold will have to be set with the aim of either assisting full-time or part-time low-earners. However, both of these groups could be among the less economically fortunate.

Furthermore, the introduction of a threshold will change people’s behaviour. Some may ensure that they work the numbers of hours required in order to meet the threshold, despite the fact that they and/or their employers would have preferred them to work fewer hours. It will thereby alter the amount of work done in society, potentially providing disincentives for some people to work and extra incentives to others.

Finally, if you add an hour requirement into the system in order to make the tax credits more effective and targeted, then there should be a means to monitor the number of hours worked by those claiming for hour credits. After all, it might appear sensible to introduce several thresholds with each qualifying someone for a different subsidy scheme. However, the more nuanced the scheme the greater the degree of monitoring that will be required. If the number of hours is potentially going to be monitored then my challenge is to ask why not go the whole hog and make good use of this information to generate a more effective system?

This is a challenge I would present to an interesting earning subsidy proposal from economist Edmund Phelps in his book Rewarding Work. Phelps proposes a subsidy that would be paid to employers for each low paid employee with the greatest payments for the workers with the lowest hourly pay. This proposal is the closest in intent to my hourly subsidy proposal, in that the subsidy would lead to higher pay for low-paid workers. However, Phelps proposes that only full-time workers should be eligible. This makes the scheme much less flexible around people’s requirements. If someone has caring or other responsibilities, or simply wants to work fewer hours, they will not receive any support in order to do so. Again this is setting an overly restrictive hours threshold, as part of a system which requires hours to be monitored anyway. 

In summary, earning subsidies are a popular proposal among economists as a way to help the low-paid without discouraging them from working as much as a basic income or negative income tax would. However, the tax credits in place tend not to be generous because this might encourage people to work fewer hours. Some people and governments have realised that earnings subsidies are much more effective if they can be applied on a per-hour basis. However, if account is being taken of the number of hours worked then I would suggest that it is much better to do this properly and provide the subsidy on a lifetime hourly basis. This would target payments to those who have a consistently low income, which is the best available unobtrusive indication of poor economic fortune.

Saturday, 8 November 2014

On Earning Subsidies (Part 2): What are the potential downsides of earning subsidies?

In my previous blog I explained earning subsidies and set out some of those who might react against such a proposal. The positions presented there are no doubt genuinely held and internally consistent ones, though I will not respond to those views in exactly those terms. I will pick out a few genuine concerns about earning subsidies and respond to them in this post.

Of course, when discussing policy options such as earning subsidies the important issue is what you compare them too—the appropriate baseline for comparison. One option is to compare any proposals to the idealised free-market situation in which a minimal state simply provides defence and enforces markets. Given that this imagined society is clearly not good for a large proportion of people—if not everyone—I don’t think I need to compare earning subsidies against this baseline. The two most appropriate comparisons are the following: i) a system which does less for the worst off in the name of economic efficiency and ii) a system which takes an alternative approach to helping the worst off such as “Predistributive” policies such as a reasonably high minimum wage along with other benefits at fairly generous levels. I covered much of the latter comparison in my previous blog on Predistribution.

However, there are some points in favour of Predistributive policies. A minimum wage would cost the government a much smaller amount in order implement; the cost of paying low-paid government workers more and enforcing the minimum wage regulation instead of the cost of topping-up the income of all low-paid workers.  Nevertheless, for the reasons I set out previously the advantages of earning subsidies should vastly outweigh this downside where there are sufficient tax revenues available to fund the earning subsidies.

I will therefore focus on the comparison with a more free-market approach—baseline i) above. The argument here might be that earnings subsidies would change the economy in ways that would make things worse overall and therefore undermine the advantages of the policy. I applied this strategy when arguing against the application of a high minimum wage and so it is only appropriate to consider this against earning subsidies.

I would certainly accept that generous earnings subsidies would change the job market. Just as with the minimum wage the higher net pay could be expected to induce some people to work more than they would have. These additional workers (or hours worked by existing workers) might displace other workers, though unlike the minimum wage the final result is less likely to be involuntary unemployment.

What might be the other changes to the job market? Some people may switch to lower paid employment which they prefer, for example because they enjoy the work more or find it more fulfilling. In this example the person will choose work that pays more, but earning subsidies might enable them to take the work they find more fulfilling. In this way earning subsidies might shift workers towards jobs that they find more enjoyable and away from jobs that provide others with goods and services they would prefer (where the wages people are paid tend to indicate that the work done is more highly valued by others—this is not always true but is enough of a tendency for the discussion here).

One argument against earning subsidies, then, is that they are going to help people who are not really economically unfortunate to do jobs that are less socially productive than the work they might do otherwise. Where this effect occurs society is made worse off while the worker in question has been made better off. In a sense I would accept this point, but my response is that I don’t see a big problem here—the person in question is happier and more fulfilled and the job they would have done is still available for someone else to do. People who have a passion for particular jobs may be more likely to obtain them and this will free up higher paid jobs for other people. Economic productivity may drop very slightly, but I would not think it would fall very much.

A relatively common complaint (usually by left-wingers) against earning subsidies is that employers will respond to them by reducing gross wages. As a result workers get the same pay as they would otherwise but employers save a lot of money on labour costs. The criticism is that government spending is therefore being used to support businesses which pay low wages rather than on other things.

I would not necessarily expect this effect to occur, as it implies that firms choose to pay more than they need to in order to ensure that their workers have a certain level of income, but let us assume that it does. In a competitive market the effect over time of the subsidy will be that the cost of the goods and services provided by these low-paid workers would fall. This is likely to have knock-on effects throughout the economy as the firms buying goods and services from these suppliers will also end up dropping their prices. Cheaper prices are no bad thing, as everyone—including low-paid workers—will benefit from these.

If like-for-like wage falls for low-earners were to occur as a result of earnings subsidies, then these would appear to be an expensive way to assist low-earners. Their effect would be to lower prices for all and hope that this helps low-earners as much as others. However, I do not think that employers would be in a position to drop wages for low-earners (particularly if my other proposal for a guaranteed work-programme were in place).

Indeed, perhaps generous earning subsidies and a generous guaranteed-work programme might provide low-paid workers who do unpleasant and unpopular work with additional wage bargaining power. The guaranteed work scheme would provide an alternative, and earning subsidies would ensure there were plenty of other low-paid alternatives. Employers might have to offer workers more than they would to undertake otherwise low-paid jobs.

I accept that in this scenario consumer prices for some goods and services could increase. However, this would occur in cases where the work is highly undesirable and wages are only kept low due to the desperate position of the workers doing the job. Redistributing towards people who do highly unpleasant jobs does not seem like a particularly bad outcome to me, even if some prices increase as a result.

In the above scenario, however, it is important to stress that not all prices would increase and that some would probably decrease as well. As I have said, my proposals, as with all earning subsidy proposals would change wages and prices compared to other policy-approaches.

Compared to other policies to help low-earners the economic downsides of earning subsidies are not nearly as serious. I do not think the effects on economic incentives are likely to be serious enough to cause us to give up on a powerful method to assist the worst off. Most importantly, a wage and price increase spiral is much less likely.

Is it futile to attempt to provide generous earning subsidies? However, the level of assistance available will depend on several factors. One is the amount of government revenue available for the programme. The other factor is the type of earning subsidy available, and in the following blog I will explain why my hourly averaging tax system provides an excellent method of providing an earning subsidy. 

Sunday, 2 November 2014

On Earning Subsidies (Part 1): Why earning subsidies?

Earning subsidies are my preferred method to improve the situation of the economically worst off. The government provides a top up to the income of workers who earn a low amount. These are utilised often under the name of ‘tax credits,’ for example Working Tax Credits in the UK and Earned Income Tax Credits in the USA. The new Universal Credit in the UK is gradually replacing Working Tax Credits.  

Unlike the basic (or unconditional, or citizen’s) income this subsidy only goes to those who work. This is achieved by only taking account of income received as a result of working (earnedincome), or by taking a declaration of the fact that someone is working, or the number of hours which they have worked.

If earning subsidies directly assist the right people, why are they not universally accepted as a good idea? Some on the left think that employers should be paying their staff rather than leaving the government to pick up the tab. This is no doubt often because they want the state to do a lot of other things and money spent supporting workers leaves less money available for other projects. Many on the left are also heavily involved in the Trades Union movement, and Unions will also be sceptical of earning subsidies for similar reasons.

Those on the right might be sceptical of earning subsidies for several reasons. Some think that free markets produce the correct outcomes and that it is always wrong to interfere with them. Others may see earning subsidies as a disincentive for people to work harder or show ambition, and that this might have unwanted economic consequences. The left-wing characterisation of the right-wing view on this might be that they want workers to be desperate and have little choice but to take terrible jobs for very little pay. I hope that this characterisation would not be correct, but I fear there might be some terrible people who would hold this view.

I will consider the more sensible concerns about earning subsidies in the next part of this series of blogs. I should mention that despite the ideological opposition described above most pragmatic and centrist politicians and activists are supportive of earning subsidies. There is good reason after all—channelling government spending to people who are doing economically useful activities but getting paid very low wages for doing so. In the third part of the series I will explain why my hourly averaging system would provide a much more effective method of assisting the worst-off than existing earning subsidy proposals. 

Sunday, 26 October 2014

New book on Taxing Banks Fairly

I received my copy recently of a book from Edward Elgar: Taxing Banks Fairly.

Don't believe me? Want proof? Here is me reading it...

It is developed from a couple of workshops, at one of which I gave a paper.

The book does something which I very much approve: it combines expert opinion about the practical options available with consideration of the moral issues surrounding the policies at hand. My view is that each one of these is somewhat bereft without the other.

Sunday, 19 October 2014

Predistribution vs hourly averaging

Following on from my previous blog, I will now argue that earning subsidies, such as my hourly averaging proposal, are preferable to Predistribution. I will begin by setting out the mainstream economic view of the minimum wage and then consider this. My argument is that a minimum wage, if effective at raising hourly earnings will have much more serious economic effects than an hourly earnings subsidy. 

I will mostly focus my arguments on the aspects of Predistribution which would seek to raise wages either by imposing high minimum wages, by imposing collective wage bargaining, or by training workers so that employers can employee higher skilled (and therefore higher paid) workers. According to mainstream economic theory, policies of the above types will cause a mixture of price and unemployment increases. I will explain the logic of this.

In the absence of any government intervention workers and employers will make agreements whereby workers get paid at least their reserve price for labour—the point at which they would rather not do the job. Similarly, employers will demand labour up until the point that the price (wage) is equal to their willingness to pay. This willingness to pay valuation will reflect the relative price and productivity of labour compared to substitute inputs such as capital.

A minimum wage acts as a price floor in the market for low-skilled labour (as illustrated in Figure 1 below, assuming that the floor is set above the equilibrium market price i.e. that the minimum wage is binding).

At price pmin the wage is greater than employers’ marginal value of labour at the market equilibrium level. This will cause employers to substitute their demand towards capital inputs and higher-skilled labour for which the relative price has now reduced. As such only quantity QD is demanded at the minimum wage rate.

Figure 1 Illustration of Welfare Loss from Price Floor

At the same time, the minimum wage rate has induced the entry of workers whose reservation wage was below the prevailing market rate, such that quantity Qs is now supplied. The minimum wage has therefore created a labour surplus equal to distance Qs minus QD. This represents the induced involuntary unemployment that results from the imposition of the minimum wage.

The social welfare loss of the imposition of the minimum wage is represented by the shaded triangle. This is welfare loss is equal to i) the surplus foregone by employers who would previously have been able to employ quantity Q’ minus QD of labour at a price above its marginal value (area A) and ii) the surplus foregone by workers Q’ minus QD who would previously have earned a wage above their reservation rate.

Some workers are worse off as they will become involuntarily unemployed. Meanwhile firms will have greater costs. Affected firms which cannot change their production processes will have to pay higher wages yet their output will remain the same. Some firms will be able to alter their processes to get more from each worker by increasing their capital inputs. This will enable them to make better use of the more expensive workers they now employ, but will cost more than employing workers at the lower rate would have done. Where firms can pass on the higher production costs they will do so, usually because all firms in the same sector are affected similarly. However, where firms cannot charge higher prices then they will lose market share to their competitors (either firms in the same sector which operate with lower wages or sectors of the economy will lose out to other sectors).

Caution about textbook models

Of course, the real economy does not work exactly like a textbook or a model. Minimum wages do not always immediately produce the above effects, a point well-made by economists such as Card and Krueger. Indeed, the minimum wage in the UK did not have any obvious unemployment and price effects. However, there are many reasons why this does not disprove the mainstream picture. For example, it was introduced gradually during a period of economic growth, and at a level that was unlikely to be biting.

A second type of caution about textbook models is that they assume that firms are already maximally efficient and will therefore pass on any costs to customers rather than increase efficiency. This may muddy the textbook response further, though in an abstract discussion between broad policy options such as this one there is little to make of this point. It does mean, however, that in some cases the price rises resulting from Predistributive policies may be avoided to the extent that efficiencies can be found elsewhere.

If the minimum wage were raised from the current £6.50 to “living wage” levels (living wage advocates argue for £8.80 in London) or the Green Party proposal for a £10 minimum wage by 2020, then it would be much more likely to bite. The more the bite the more reasonable the expectation that the above described effects will occur.

The extent of the unemployment or price rise effect will depend upon the sector in question, and whether a) the cost can be passed on to consumers (increasing prices), b) whether it is possible to substitute capital instead of workers (increasing unemployment) and c) whether the work can be done elsewhere—either directly by the same employer or indirectly where an industry declines in one country and increases in another.

Predistributive policies like the minimum wage may not end up causing mass unemployment. However, this would be because they would cause major shifts in the direction of economy. Employers who can pass on their costs to customers will largely continue as before, while those which cannot will decline. For example, retail spending would be maintained. However, the difference is that industries with competitors or sites with less onerous minimum wage regulations would switch production to those cheaper locations.

Supporters of Predistribution might respond that ideally the minimum wage would apply to all the employers in the world. However, even this would mean that employers would have to provide work that was worth doing at that minimum wage. Employers would have to alter their production methods in order to make sure it is worthwhile employing all their staff at a higher rate. The new methods of production would, by definition, be different from that undertaken in the absence of the minimum wage, and these methods are clearly less efficient than the alternative. Employers will pass this loss in efficiency on to consumers in higher prices for their products (assuming they are unable to make efficiencies elsewhere). Even those who do not purchase these products will be affected as those who pay more for the affected products will have fewer resources to expend elsewhere (or invest) than they would have done without the minimum wage.

A final important point is that price rises are not only going to occur in industries heavily affected by the minimum wage. The rises in prices will filter through the rest of the economy as other sectors will make use of goods or services provided by these industries. If the latter industries have more expensive inputs then they will often pass these on in price rises as well. For example, if it becomes more expensive to run a transport distribution company then these costs will be passed on to all businesses using this service. These increased costs will be passed on to the consumers who buy items that have been transported—which is pretty much everyone.

Market interference is acceptable

Now, I am fully in favour of interfering in markets to assist the less fortunate, and also to respond to market failures. I’m not a free-market ideologue. My disagreement with Predistribution therefore arises where policies to raise wages or productivity interfere with the market in a counterproductive fashion.

Earning subsidies such as those I propose would also interfere with markets. However, if they are well-designed they will do little to alter the overall pattern of employment. The primary outcome is that most people receive more income for doing similar work to that which they would have done otherwise. Predistributive interventions, on the other hand, will interfere in a much more profound manner.

Essentially my argument is that Predistributive policies may help some people, but will often make a lot of other people worse-off. My tax proposals are highly progressive and so I am happy to make some people worse-off if it makes society as a whole more just. However, Predistributive policies are likely to make some less well-off members of society worse-off as well as many of the better-off.

The distributive effects of Predistributive policies may not be as consistently progressive as its advocates assume. If economic growth is reduced as a result of the economic inefficiencies generated by the policies then this could make everyone economically worse off, potentially reducing tax revenues as well. Price rises would also impact on everyone’s spending power, as their income would not go as far as it would have otherwise.

The main way in which some of the least economically fortunate will definitely end up much worse off is if they are rendered unemployed. This would not only occur because the unemployment rate would be expected to increase, but also because those most desperate for work (and therefore have a reservation wage) are the most likely to miss out on work. The change in the job market may induce other workers to take jobs or work longer and they would take the place of those who want the work more.

All of these points mean Predistribution can create a group of people who are rendered worse off than they would have been otherwise.

Predistribution vs. Hourly Averaging

As I have explained, Predistribution will produce at least one (and possibly all) of several deleterious effects; increasing prices, increasing involuntary unemployment, and shifting economic activity in unwanted directions.

For the above reasons, the overall distributive effects of Predistributive policies may not be as universally progressive as its advocates may assume. Some unfortunate people may end up worse off than they would with much less intervention. Even for those who would earn more, countervailing factors—such as lower levels of economic efficiency and higher prices—would eat into their gains.

The international nature of the economy adds further problems. If one state adopts wage-increasing policies it may make some of their industries less competitive, which will worsen the balance of trade and the ensuing impacts of this further down the line. If all countries adopt the Predistributive policies then this is likely to cause mass involuntary unemployment and harm global economic growth.

I think Predistributive policies are preferable to leaving everything to the market. However, they interfere with market-led efficiency much more intensely than hourly averaging would. As long as it is possible to generate the tax revenues necessary to provide earning subsidies then this is clearly the way to go.

Saturday, 11 October 2014

What is Predistribution?

In a previous blog I set out the methods of taming capitalism. One approach has a new name, but is based upon some longstanding proposals. This is the idea that government should intervene in the economy not in order to redistribute from relatively free-market outcomes, but rather to pre-distribute.

The most obvious way to pre-distribute is to set a very high minimum wage. Another (independent) method would be to bolster the power of trades unions, perhaps by insisting that employers only employ those who are part of a trade union. A close alternative to the previous approach is to compel employers to bargain with their staff as a whole over the wage rate they pay.

These approaches clearly differ from my hourly average subsidy proposal, which is a form of earning subsidy. My approach allows employers to compete with one another and to make agreements with their employees. If people are low-paid as a result of this process the hourly subsidy will make up the difference.

There may be further aspects of Predistribution which are compatible with other proposals including my own; for example government provision of training. Improving the skills of the workforce may mean that workers can earn more than they would otherwise. I advocate training schemes as part of the guaranteed work/training programme that I consider an integral part of hourly averaging. The aim of the scheme I advocate is not to increase gross pay, however, but rather to increase the chances that people will be able to find useful employment. It may have the same outcome but the aim is not primarily about predistribution.

The advantage of Predistribution over earning subsidy proposals such as mine is that it requires significantly less government spending. The primary Government spending commitment is the increased amount that government must pay its employees more as a result of the policies. Advocates of Predistribution are attracted to the proposal either because it would enable governments to reduce taxes throughout society, or (much more likely) because it would leave more tax revenues to be spent on other things.

So why bother with earning subsidies if Predistribution is a much cheaper and more effective option? I advocate earnings subsidies as the interference in the market should be much less damaging and more effective than “predistributive” interventions. I will make this argument in my next blog.

Sunday, 21 September 2014

Government Provision of Goods and Services as redistribution

The diagram in my previous post omits another prominent way of redistributing, popular in the UK until recently. This is redistribution through the provision of goods and services by government. Providing can be a means of redistribution, and in many cases this is to be applauded. However, there are degrees to which this can occur.

I will assume that the provision of certain basic goods and services (democracy, law and order, defence) in a redistributive manner is uncontroversial. (Murphy and Nagel, in their excellent book 'The Myth of Ownership' make this point).

However, some would propose that government should provide a lot more services, and that this should be the primary way of creating a more equal capitalist society. This was common in the UK in the middle of the 20th century, for example.

If the government provides services on a universal or limited basis then this is a means to redistribute resources. This could be done by providing some service or good to all people (and not just because it is a public good that cannot be provided by the market), or on a targeted basis to those deemed to be most deserving or suitable.

A good example is the state provision of housing (I will ignore the universal provision of education and health, since there are further specific reasons to provide these on a universal basis).

The problem I have with state provision is that it will favour those who are selected for the benefit—people who get state-provided housing for less than those who purchase or rent privately. Those who are not chosen will not benefit (except in rare cases where the provision corrects for a market failure). In order to avoid this favouritism the good could be provided to all people, but this is likely to reduce the choice available to people.

The latter example shows a further problem; that the provision of goods and services that can be provided by the market will often be inefficient. Simply giving people the money would be a more cost-effective way of achieving the desired redistributive effect. This is certainly the case in the extreme example where everyone has their housing provided by the state, but this point no doubt also applies to many other cases as well.

The economic argument against providing goods and services directly to people is very strong. However, there may be some further justifications that supporters could draw upon:
1. People can't be trusted with money - if you give them money they might waste it but if you give them something clearly good then it will benefit them.
2. Universality and solidarity - that providing these goods represents the value of society.
I'm not convinced by these lines of arguments, but I'd be interested if anyone wants to try to defend them below...

Saturday, 20 September 2014

Ways of Taming Capitalism

Free market capitalism is a system that works very well for a small number but not always very well for regular working people. I propose a tax system that would radically redistribute income from the most economically fortunate to those who work for low wages.

There are various responses to this which have been tried at various times and to various degrees, and it is worth mapping out the differences. We can distinguish between redistributive and predistributive ways to make capitalist societies fairer. (It is arguable that all the approaches are really redistributive in the traditional sense of the term, though I will follow the recent trend in distinguishing Predistribution as a separate approach).

In the redistributive camp are proposals that would take tax revenues and spend them to improve the position of the worst off in society. There are many ways of doing this, and I will briefly outline these in the diagram below.

The proposals above are not all mutually exclusive. However, since all - if they are to make a real difference - are going to have high costs and/or economic effects it is unlikely to be practical to have more than one at a time.

My proposal (in italics above) is a form of hourly earning subsidy. The only other hourly 
income subsidy proposal I know of is that proposed by Nobel-Prize winning Economist Edmund Phelps in his book Rewarding Work. Phelps' proposal would provide money to employers in exchange for the employment of full-time, low-paid workers. This money would then be passed on to the workers in higher wages. My proposal would instead take account of the number of hours that people work (up to a maximum), and provide a subsidy to them if their lifetime average is below a certain level. My argument is that there is no reason to limit the subsidy to those in full time work.

I have discussed Universal Basic Income/Negative Income Tax proposals in previous blogs, and plan to discuss the others in future blogs.

Sunday, 14 September 2014

How radical is the CLIPH-rate tax?

My tax system proposals are in many ways very radical. However, they may not be radical in the way that everyone would think of the term.

The proposal to calculate tax (or for some a subsidy) taking account of the number of hours that people have worked (or been excused from work) in their lifetime is a significant break from previous ways of calculating taxation. In this sense, hourly averaging is a radically new proposal.

The CLIPH-rate tax is also radical in the way it would change the economy and the distribution of resources therein. Everyone would effectively become working class, since all would need hour credits from working in one form or another. The difference in income between the highest and lowest earners would be radically reduced.

Of course differences in wealth would remain, since some would spend all their income while others would save. Nevertheless, the differences would be much less marked than they are in any other capital-based economic system.

However, radicalism can also means something further which does not apply to the CLIPH-rate tax. This is the idea that society should be altered and reimagined through the process of revolution or class warfare.

My tax proposals pursue equality through a continual redistribution of income from the fortunate to the less fortunate rather than any kind of revolution or change in social or human nature. People would still pursue their interests in a society with a market and almost all of life would work as it does not.

The CLIPH-rate tax proposal is not radical in this latter sense of the term, and some may see this as a bad thing. Some may simply want society to be totally different than it is and blame capitalism and free markets for the problems they perceive with current societies. The CLIPH-rate tax offers nothing to such radicals.

However, the CLIPH-rate tax does offer a challenge to those who defend the status quo; while the other radical plans may appear utopian the CLIPH-rate tax does not require the leap into the dark that revolutionary radicals propose. To those who believe in capitalism and markets, the challenge is to say why can’t there be radically more redistribution, given that it is possible within a capitalist economy?

(Photo Credit: Flickr Creative Commons/Ed Gaillard. Occupy Wall Street marched into Lower Manhattan on September 17)

Sunday, 31 August 2014

What are the Politics of the CLIPH-rate tax?

I believe an argument can be made for my taxation proposals from a number of political philosophies. However, in terms of political ideologies, my proposals occupy an unusual position that does not fit neatly on the usual political compass. This means that it does not readily fall within the common political positions.

I believe this is a huge strength for my proposals: I believe it should be attractive to a large number of people who currently take positions across the political spectrum. However, while this is an advantage in the long-term, it could be a hindrance in the short-term. After all, while there is something about the proposals that most people would like there will often be another element which goes against their current thinking.

For those on the political right the proposal should be attractive as it contains strong private property rights, and encourages work and personal responsibility. Work is encouraged because the number of hours people work (as a generalisation of the scheme) is taken into account in determining tax rates: people who work longer for their income will be taxed at a lower rate. It encourages personal responsibility as the redistribution is calculated on the basis of the amount of work someone does and not the amount of wealth they have. If someone chooses to spend their income in the short term they will not be entitled to any additional resources later on as a consequence.

For those on the left the proposal should be attractive for the amount of redistribution it can provide. I believe my proposals, if applied consistently, should enable the most economically fortunate to be taxed sustainably at the highest possible rates. In parallel, it would provide the highest possible economically sustainable subsidies to workers.

I would think that on the basis of the advantages specified above the approach should be appealing to centrists, who would also approve of my liberalism and some of the related proposals I make. As the originator of the proposals I would consider myself a liberal person.

One way to put the political position of the CLIPH-rate tax is that of a superior version of the so called “third way.” This garnered attention in the 90's and which is associated in the UK with the New Labour movement, and is somewhat related to Clinton’s position in the USA. Left-wingers are now disillusioned with this approach to politics as it was ineffective at delivering economic equality; New Labour was too in thrall to the market and thereby blinded to special interests (often of the very wealthy and the finance industry).

Despite this criticism of the first iteration of the third way approach to politics, I do not think that the answer for progressives is to revert back to statist solutions. Instead, we should be developing taxation and earning subsidy policies that make use of the best of the market while assisting those who do not do as well from the market economy.

The proposals in Rethinking taxation are designed to achieve what the initial third way failed to do. Tax those who do well out of the market system and do as much as possible to support those who work hard but receive relatively little in return. 

Thursday, 28 August 2014

Rethinking Taxation now also available from more online bookstores

Rethinking taxation has so far been available from Amazon stores throughout the world.

It is now also available at Waterstones and Foyles in the UK and Barnes and Noble in the US!

Look out for it at your favourite online book store!

Saturday, 23 August 2014

What is the Comprehensive Acquired Income tax base?

My proposal for a Comprehensive Acquired Income tax-base takes elements of Comprehensive Income (or Accretion, or Schanz-Haig-Simons) taxation and also elements of Consumption taxation.

The idea is to record the market value of the resources that people receive from their society, at the time at which the person receives them. This means that if someone receives some money, goods or services from another party (whether it be their employer, a return on an investment, or a gift from another person) at a particular time the assumption should be that this would count as gross income and be liable for tax.

As it is designed be applied on a lifetime basis, my Comprehensive Acquired base removes the most controversial requirement of the Accretion approach. This is that everyone’s property should be valued every year in order to find out how much it has changed in value. This would be a very difficult, and no doubt controversial, annual undertaking, and few people propose applying this traditional ideal in the real world. Furthermore, people may not have the liquid assets to pay the tax liability on property they own which has increased in value. The Accretion approach therefore shares this controversial aspect with proposals to tax people on the total value of their property; the wealth tax.

Removing the focus on the annual change in wealth as part of the tax calculation raises the question of when the tax is applied. The simple answer is that gains are taxed when they are realised. When someone receives money from their employer or sells something they own for a profit this would then count as part of their lifetime taxable income. This lifetime tally would therefore increase as time goes on, and lifetime averaging proposals such as mine allow the denominator by which to divide this lifetime total to increase as well.

It is possible within this approach to allow the deferral of taxation on certain forms of gains, for example investment gains. The idea is that certain types of income could be ring-fenced such that any gains that remain within the ring-fence remain untaxed. It is only when people switch resources from these special categories to a form which can be used for consumption (such as a current account) then the lifetime gains on such ring-fenced investments can be accounted. Once the total gain exceeds the total invested then these profits can count as lifetime income. In many cases this profit will occur when the taxpayer dies and their property is valued/constructively realized prior to disbursal. Financial investments and company ownership are the obvious candidates for such treatment, but a primary residence is another potential category.

I have described my proposal at various points as an ‘income’ tax base and as a hybrid with consumption taxation, which needs to be explained. If the state were only to tax financial income this might encourage employers and benefactors to provide resources in the form of services instead of financial income. In order to close this loophole, it is therefore necessary to insist that the market value of goods and services that have been paid for by others should also be included in someone’s lifetime tax calculation.

Clearly the presentation provided above is a relatively simple one and there are more difficult issues and exceptions to take account of. For example, I would argue that certain forms of income should be excluded, such as small non-financial gifts. These gifts, as long as their cumulative value is small, are not resource-transfers but rather tokens of affection which need not be taxed. However, I will have to point readers towards Chapter 4 of Rethinking Taxation for a fuller discussion of my tax base and potential exceptions to the principle that the market value of all income should count as taxable. 

Friday, 22 August 2014

My tax base proposals

In a previous blog I listed my tax base proposals among the innovations presented in Rethinking Taxation (Chapter 4, to be precise). I refer to my proposal as the Comprehensive Acquired Income tax-base. I thought it would be a good idea to briefly explain tax bases and this proposal.

What is meant by the ‘tax-base’? This is what is made use of in calculating the tax of the members of society. Most states employ multiple different taxes which make use of different tax bases (labour income, estate taxes, corporate taxes, VAT, sales taxes, various duties etc.). I refer to the use of multiple taxes as a broad tax base, as many types of transaction are taxed.

The broad base is popular choice for states as it provides a lot of tax revenues, though often each one is applied at relatively low rates. The advantage of relatively low rates on each of the taxes is that it will not discourage economic behaviour too much. The problem is that this will not be very progressive where the most economically fortunate will never have to pay more than the highest amount of tax charged, usually lower than 50% and often more like 20%.

Multiple broad-based taxes fall on those who make a lot of economic transactions, which means the rich and poor alike. VAT, for example, is not a progressive tax base as the cost will often fall on consumers, and the poor usually spend almost all their income on the necessities of life. Some claim VAT is progressive since food is zero-rated. However, many poorer people purchase hot food, while some very wealthy buy expensive ready meals from places like M&S, Waitrose and Fortnum and Masons.

For these and other reasons, many people have suggested the application of a more comprehensive tax base. The Comprehensive Income tax base was a popular theoretical approach by which to judge the tax system up until the 1970s. This is also sometimes referred to as the Accretion tax or the Schanz-Haig-Simons tax base after some of its prominent proponents. Consumption taxation has increasingly been considered an attractive alternative since it was proposed again in earnest in the mid-20th century.

These comprehensive tax bases are considered less practical than the application of a broad base as it would be hard to reliably capture the amount of spending or income that people truly enjoy. Nevertheless, I believe that developments in Information Technology should lead us to reconsider the options for tax calculations. I propose a lifetime approach to taxation, which does not work well with the traditional comprehensive income tax base, but I believe my hybrid of the Accretion and Consumption tax bases represents a way of capturing the lifetime benefits that people get from their society. 

In my following post I will describe my Comprehensive Acquired Income approach.

Monday, 18 August 2014

Hourly averaging and the need for a job guarantee scheme

One of the proposals I make in Rethinking Taxation which I did not list as one of the innovations presented in the book is that of a guaranteed job scheme. I did not list it as an innovation because such a notion—that the state should be the employer of last resort—has existed for a long time. After all, since unemployment is an evil, it is not a huge leap to think that the state should do something to respond to it.

Involuntary unemployment is a very important issue and there are various responses to it. These can be understood in terms of their conditionality. At one extreme no conditions could be placed on unemployment payments: there could be a guaranteed basic income for all. At present the conditions in the UK for “jobseekers allowance” is that claimants attend regular meetings, actively seek and apply for work, and sometimes that they undertake training or (otherwise) unpaid work. The strongest (reasonable) condition available is that claimants should have to do work appointed by the state in order to qualify for assistance.

If the state insists upon the strongest conditions then it should have to provide work. My hourly averaging proposal takes account of the amount of time that people work when calculating their tax rate, with lower taxes for those who work more hours. This makes it highly important that everyone should be able to get work, and that those who receive hour credits should have to work in order to obtain them. A guaranteed work/training scheme obviously follows and I therefore include one as a necessary component of my CLIPH-rate tax proposal.

This position sets me in opposition to “basic income” supporters, and I have blogged about this previously. However, I wanted to discuss here some of the complaints about guaranteed work programmes and why these are not too much of a problem for my hourly averaging proposals.

My response to a lot of these complaints will make reference to a point that I should explain beforehand. As part of my hourly averaging proposals I suggest that workers on very low wages should be provided with an earnings subsidy. This means that the minimum wage can be reduced (for most employers at least) without jeopardising the standard of living for workers. Removing the minimum wage should open up a lot of possibilities for types of work that would not be economical at the minimum wage. This means that the involuntary unemployment rate should be relatively low as there should be more work options.

One complaint about guaranteed work programmes is that they would effectively undermine certain forms of paid work. A common example is that if unemployed people are tasked with cleaning up the local streets then this will take away the need to employ streetsweepers. These workers would end up doing the same work for less money as unemployed workers rather than provided with secure employment. Unions are therefore sceptical of proposals.

My response to this is to argue that in the first instance job schemes should design specific projects that may not be undertaken otherwise. Furthermore, other employers could request spare workers to undertake work for which they have a shortage of workers. However, this leads on to the second complaint.

The second complaint is that firms can take advantage of the scheme in the same way that occurred with the streetsweepers. They could lay off their workers and then request to have free work from the guaranteed work scheme. In order to counter this I would suggest that workers should only be lent from the scheme to profit-seeking businesses if the business in question pays the lent workers (or compensates the state) at a suitable rate. This rate should perhaps be set at the hourly amount at which workers would receive no earning subsidy. Employers would then consider employing people at a lower rate than they would have previously, no doubt making industries and products competitive that were not at the previous minimum wage.

The third complaint I will mention is an economic one. This is the argument that having a reserve of unemployed (or underemployed) workers is good for the economy as it keeps inflation low. The main reason for this is that the spare workers add flexibility into the job market. If there were full employment then industries looking to expand would have to pay a significant premium in order to attract workers. These industries would then be less competitive than they would otherwise be, and the companies involved will pass these costs on to their consumers.

Would the guaranteed work scheme therefore cause inflation? Some economists have argued that full employment would not cause inflation, and if they are correct this worry does not apply. However, what if they are wrong and some products would increase in price due to the changes I advocate? In this case, I would suggest that the price increases indicate that the products are currently too cheap; the desperation of the workers in the industry is what is keeping the price low. For egalitarians such as myself, it is simply unfair to cause misery to a few in order to improve the position of everyone else (or a small group).

Furthermore, another important point is that hourly averaging would reduce some prices as well. By enabling a reduction in the minimum wage, some types of work could be done for less money, with the saving passed on to consumers. For some items, prices would drop, while for others prices would rise.

I feel confident that a bit of price inflation would be an acceptable price to pay to greatly reduce the misery caused by involuntary unemployment. I don’t deny that my fundamental tax system proposals would alter prices throughout the economy. Some items would increase in price will others would decrease. Given that the increases would arise from an improvement for low-paid workers who are usually in the worst position in society, the changes would clearly be a moral improvement overall. 

Sunday, 17 August 2014

What is the CLIPH-rate tax?

The CLIPH-rate tax is the acronym I developed as a shorthand way of describing my taxation proposals. It stands for Comprehensive Lifetime Income Per Hour rate.

This can be split into two components; hourly averaging and my proposal for a comprehensive acquired income tax base. The two proposals complement each other very well and are linked by the Lifetime element of the acronym.

The first component is my hourly averaging proposal. This is described in the acronym as ‘per hour rate’ and it is explained in detail the first two chapters of my book.

Hourly averaging allows taxes to be calculated not only on the amount that people earn but also the amount of time they have spent working (or doing some suitable alternative activity). This means that those who work longer for less pay can be assisted while those who earn a lot for each hour they work can be taxed.

The second component is my proposal to take account of all the economic gains that people receive during their life when determining their tax rate. This is the “Comprehensive Lifetime Income” parts of the acronym. My proposal can be understood as a hybrid which combines aspects of comprehensive income with consumption taxation.

These two components, along with others that go with them, are explained in more detail in my book, and I have said (and plan to continue to say) more about them in this blog as well. In my next blog I will explain the advantages of the CLIPH-rate tax in the briefest terms. 

Thursday, 14 August 2014

List of innovations in “Rethinking Taxation”

In my previous post I explained the main innovations I present in Rethinking Taxation. Some may find it useful to have these presented as a list. I have done this, with page references in brackets:

Primary innovations
1. Lifetime hourly averaging (Part I: page 13-73, see also pages 99-152, 164-68)
2. Comprehensive acquired income (84-97)
3. Only realised capital gains are taxed, and these gains can be untaxed until they are made available for personal consumption expenditure (pp. 88-91)

International taxation

4. International tax proposal (pp. 154-63)

Information Technology proposals

5. Proposals to use Information technology to enable greater fairness or effectiveness within the tax system (3)

a) Proposal to integrate financial and taxation systems to achieve automatic withholding at source (91-2)
b) Proposal to designate the owner of all financial accounts and products and items that are i) valuable, ii) likely to increase in value (92-3)
c) The suggestion of online interaction with the tax authority in order that people can i) provide information, ii) approve or deny ownership and transfer claims made by others, iii) run scenarios in order to help them make decisions about their work. (6-7, 52)

Other innovations, proposals or solutions:

6. Proposal to integrate benefits and tax system using negative hourly tax-rates (26-8, 41, 68)
7. Combining student, disability and caring support into the tax system (37-44)
8. Using the tax system to administer punishments (46-7)
9. Proposal to allow the merging of personal tax accounts to create a joint account (106-7)
10. Lifetime taxation of resources for children (100-3)

I have not listed proposals which are reasonably familiar such as a guaranteed work programme (38-41) and the use of a sovereign wealth fund to ensure that long-term investments are made (72, 120-4)

Wednesday, 13 August 2014

New proposals and innovations presented in “Rethinking Taxation”

The title of my book makes a bold claim; that I present new thinking about taxation. I should therefore say something about the innovations that the book contains. Some people may only be interested in one or two of the proposals, but a lot of them complement one another very well.

The main innovation is the one mentioned in the subtitle; hourly averaging. This is the new form of tax calculation that is explained and developed in part I of the book. I will no doubt explain this proposal at various different lengths in future blogs. However, the basic idea is that the amount of time people spend working should affect the amount of tax that they pay. Combining together income and time spent in my proposed averaging calculation is a superior basis for taxation than income alone.

The second major proposal that I make is for a tax base that would work very effectively with lifetime hourly averaging. My proposal is for a hybrid between comprehensive income and consumption taxation. I refer to this as the Comprehensive Acquired Income tax base as it aims to capture all the forms of valuable gain that people receive. This will include financial gain such as payment in money, but should also include the value of the goods and services that people receive (of course with a few exceptions, such as small gifts up to a certain value). Including all forms of income ensures that people will be taxed in accordance with their economic fortune—it does not matter what form of fortune people have as all will be included. A further advantage of this is that people who have multiple forms of good or bad economic fortune can be distinguished more effectively.

The third main innovation I present in Rethinking Taxation is a component of my Acquired Income tax proposals. This holds that people should be able to invest their own (after-tax) resources in certain kinds of investment and that these should remain untaxed until the gains are realised. It can be referred to as the realised gains approach to capital gain and investment income. The idea is that as long as money is invested in a particular kind of asset (financial being the obvious ones but a primary residence would be another possibility) then no tax is due. Returns on these investments would only be taxed when the return to the owner exceeds the amount of their own money that they put in. The idea is that all gains should be taxed, but that this tax can be deferred for some kinds of investment. This allows people a degree of flexibility in their investments and means that in some cases people will not pay tax until they die (in which case they are unaffected by the tax).

Another proposal I present in the book is one that I have also written about elsewhere. This is my proposal for a method of taxinginternational citizens on their global income. The proposal specifies how to calculate a global tax-rate based upon the rates within the states with which the individual has a historical relationship. I argue that states who would have taxed the individual more should be provided with more of the revenue from the taxpayer as a counter-incentive to the tendency for states to compete tax-rates down in a global “race-to-the-bottom.”

The proposals above all become possible by using Information Technology but I also present other ideas to make more use of IT. One proposal is that if you move to a comprehensive acquired income tax base it might be advisable to switch to real-time tax withholding by financial institutions. When someone receives any money from an account other than their own this could be taxed at the appropriate rate. This means all financial accounts would have to be designated with their owner, which should have the additional advantage that all ownership and all financial should in principle be traceable back to real persons.

Further information could be recorded in the form of asset registers. These would record the owners of certain kinds of item, as is already done for land and automobiles. These registers could be extended to other items such as artwork and jewellery, and also integrated with the tax system so that capital gains would be automatically recorded. This would have the advantage of making ownership disputes much simpler to resolve. Finally, I propose that taxpayers should have a means of interacting with the tax authority in order to provide information about taxable items that they buy, sell, and gift. Taxpayers could also use this to run scenarios when they are considering different options such as a new job.

Finally, there are many innovations that are internal to lifetime hourly averaging. The first is the proposal to provide a lot of benefits through the tax system using hour credits (and negative hourly tax-rates where this applies). This means that financial compensation can be provided for the disabled, students, and carers using the hour credit system. Hour credit fines could also be used as a form of punishment, since these would be cheaper simpler to administer fairer than the alternatives. I believe it would be fairer as well as the fine would relate to the economic position of the person being fined.

Lifetime taxation also provides opportunities to change the tax system for children and cohabiting couples. I propose a way of taxing children using their lifetime tax account where they receive a lot more resources than their peers. I also propose that people should be able to merge their lifetime accounts, and demerge them later on if necessary.

The above descriptions give some idea of the sort of ideas that I present in the book, some of which I would like to blog about separately, and in some cases develop further. I hope these will be of interest to people interested in economic justice and politics, as well as those interested in taxation policy. 

Sunday, 10 August 2014

Hourly averaging explained

Hourly averaging is the primary idea contained in Rethinking Taxation, so it is probably a good idea to set out briefly what this means. Hourly averaging is a new way to work out what tax-rate people should pay. It therefore rivals proposals that calculate the tax rate based on the value of a particular transaction (such as most duties and consumption/sales/ excise taxes). The main rival, however, is the idea that the total amount that someone receives in a year is the appropriate determinant of someone’s tax rate (as with income tax).

Hourly averaging alters this annual taxation in two opposite directions. On the one hand the horizon of the tax is increased from a single year to the lifetime of the individual. So instead of treating each year’s income separately in calculating tax, all the taxpayers’ income is included. This is not a novel proposal: the idea of multiple year tax averaging and its logical extension of lifetime averaging are longstanding proposals.

The innovation comes in the other part of hourly averaging. Instead of dividing the income by the number of years that have passed, I propose to use hour credits as the denominator. People would receive hour credits for a number of reasons, but the archetypal source of an hour credit is that someone has performed an hour of work for their employer. The employer would inform the tax authority of the work done, and this would be included in their tax calculations from then on.

As I explain in the book, calculating tax on a lifetime basis using hour credits allows for highly progressive tax rates. High rates can be applied to those with a high hourly average income. Furthermore, negative hourly tax rates can provide a powerful earning subsidy to those who have a low hourly average income. The tax graph could look something like this:

In order to illustrate how hour credits work, consider Ginny and Humphrey who work for the same company. Ginny has always been paid £24 per hour while Humphrey is paid £8 and both have 10,000 hour credits built up over their lives. Their total lifetime incomes are £240,000 and £80,000. Ginny’s tax rate is 50% while Humphrey’s is zero percent, and so Ginny has received £120,000 lifetime net income and paid the same amount in taxation.

If Ginny and Humphrey’s employer swapped their roles around their hourly average will change. In the subsequent month, they both receive 200 hour credits. Ginny’s total earnings are now £241,600 and her average has dropped to £23.69 per hour. Assume this reduces her tax rate to 49.5%, in which case she should have paid £119,592 across her lifetime. This is less than her existing lifetime tax payments, and so Ginny will receive a tax rebate of £408 along with her wages of £1,600. Her net income for the month will therefore be £2,008. Humphrey receives £4,800 gross income for the month, which increases his lifetime gross income to £84,800. His hourly average is now £8.31, which increases his lifetime tax rate to 1%. His lifetime tax is therefore £848 and he receives £3,952 in net income for his month’s work.  

It may appear that the tax system is extremely generous to Ginny and Humphrey at this point in time. Humphrey’s tax rate does not rise to the level that Ginny was paying and Ginny receives a tax rebate for her past tax paid on top of her wages. This is in fact an advantage of hourly averaging from the perspective of taxpayers; it smooths out people’s net income over time. Once Ginny and Humphrey have had their new jobs for 10,000 hours they would both have received £320,000 in total and have an hourly average of £16. They would have the same tax rate at this point; which I will say is 20%. However, as time goes on with their new income Humphrey’s tax rate would increase while Ginny’s rate would drop. After 100,000 hour credits Humphrey’s average would be £22.40 and he would therefore have a lifetime tax percentage in the high forties.

Taxing people in this way means that a lot of revenue can be generated from the most economically fortunate (those who make use of their talents or position to earn economic rents) and shared to those who work hard but for low pay. No other proposal promises to do this.

Furthermore, calculating tax in the above manner would mean that everyone would want more hour credits. After all, this would reduce their tax-rate for any given amount of income. Hour credits would effectively represent additional income to their recipients; each person would know that they receive x amount of money whenever they get an additional hour credit. This means that people will have a strong incentive to work longer, counteracting the common complaint that taxing the fortunate and assisting the less fortunate discourages people from working.

Hourly averaging is a proposal that utilises the advantages of the market economy such as the incentives to produce and consume in the most efficient way. However, it counteracts the inequities that market economies perpetuate; that some do very well while others struggle. The above description and examples present a simple example of how the proposal would work. More detail on the proposal and responses to various concerns can be found in Rethinking Taxation.

Thursday, 7 August 2014

What is hourly averaging?

Hourly averaging is the primary idea contained in Rethinking Taxation, so it is probably a good idea to set out briefly what this means. Hourly averaging is a new way to work out what tax-rate people should pay. It therefore rivals proposals that calculate the tax rate based on the value of a particular transaction (such as most duties and consumption/sales/ excise taxes). The main rival, however, is the idea that the total amount that someone receives in a year is the appropriate determinant of someone’s tax rate (as with income tax).

Hourly averaging alters this annual taxation in two opposite directions. On the one hand the horizon of the tax is increased from a single year to the lifetime of the individual. So instead of treating each year’s income separately in calculating tax, all the taxpayers’ income is included. This is not a novel proposal: the idea of multiple year tax averaging and its logical extension of lifetime averaging are longstanding proposals.

The innovation comes in the other part of hourly averaging. Instead of dividing the income by the number of years that have passed, I propose to use hour credits as the denominator. People would receive hour credits for a number of reasons, but the archetypal source of an hour credit is that someone has performed an hour of work for their employer. The employer would inform the tax authority of the work done, and this would be included in their tax calculations from then on.

As I explain in the book, calculating tax on a lifetime basis using hour credits allows for highly progressive tax rates. High rates can be applied to those with a high hourly average income. Furthermore, negative hourly tax rates can provide a powerful earning subsidy to those who have a low hourly average income. This means that a lot of revenue can be generated from the most economically fortunate (those who make use of their talents or position to earn economic rents) and shared to those who work hard but for low pay. No other proposal promises to do this.

If tax was calculated in the above manner everyone would want more hour credits. After all, this would reduce their tax-rate for any given amount of income. Hour credits would effectively represent additional income to their recipients; each person would know that they receive x amount of money whenever they get an additional hour credit. This means that people will have a strong incentive to work longer, counteracting the common complaint that taxing the fortunate and assisting the less fortunate discourages people from working.

Hourly averaging is a proposal that utilises the advantages of the market economy such as the incentives to produce and consume in the most efficient way. However, it counteracts the inequities that market economies perpetuate; that some do very well while others struggle.

You can find out more about hourly averaging from my book 'Rethinking Taxation' or by looking through more of my blogs. If you have any thoughts please leave a comment below or send me a direct message.

Wednesday, 6 August 2014

It's here!

10 years ago I had an idea about taxation...
This week I finally got a copy of the resulting book in my hands
Available from Amazon.

Monday, 4 August 2014

International Taxation Proposals

My international taxation proposals are set out in a few papers I have written and also in chapter eight of Rethinking Taxation. Each of these presents the proposal with a different focus.

The first paper I wrote on the topic has been published in "Comprehensive lifetime taxation of international citizens: A solution to tax avoidance, tax competition, and tax unfairness,” in Jeremy Leaman and Attiya Waris (eds.), Towards a New Political Economy of Tax Justice (Oxford: Berghahn Books, 2013).

In this I set out my proposal for taxation of international (or multinational) citizens and argue that the approach solves many problems in international taxation. I argue that there are practical reasons why states would agree to cede some of their power over tax gathering if recent trends in the "offshoring" of the tax base continue. I also argue that it provides a useful moral baseline against which we can judge people's tax contributions.

The proposal I make is a method of calculating a global tax rate for people (though it could also be applied to companies) who have a relationship with multiple countries. I therefore distinguish between people who are properly taxed only by their primary state of birth and residence from 'international citizens' who would be taxed according to a formula. This is calculated by determining the relative strength of their relationship with their past states (and therefore their citizens), and the amount of tax they would have been charged if they had been resident of each of those states alone.

I have set out the philosophical justification for my approach in an article in the journal Moral Philosophy and Politics : "Realising International Justice: To Constrain or to Counter-Incentivise?"

The advantage of my proposals arises in the way that the revenues from this global tax on international citizens is shared out. Instead of sharing out revenues in accordance with the relationship of the states involved, there would be a counter-incentive which would reward the states which would tax the individual at the highest rates. This counteracts the tendency for states to compete down on tax rates, though it does not stop states from doing this if they wish to.

Thursday, 10 July 2014

International taxation and international agreements

The other week I went to a conference at the Said Business School in Oxford on Base Erosion and Profit Shifting (BEPS). The details, and some of the slides are available online. This phrase is used both to describe a problem and (sometimes confusingly) the current attempts being undertaken by the G20 and OECD to respond to the problem.

Profits and income are shifted ‘offshore’ and the tax base is thereby eroded. Tax ‘havens’ offer either secrecy or low rates and this lures money into their country. Other states then follow suit and this creates competition for the remaining tax base.

I have taken an interest in this issue since it is a hugely important one for anyone who believes in progressive taxation (basically anyone other than hard-core libertarians).  Companies and wealthy individuals have been increasingly manipulating their assets and income streams to fall through the gaping holes in the international tax ecosystem. This means that often those who should be paying the most in tax actually pay less than many (and in some extreme cases pretty much all) ‘regular’ taxpayers.

The conference speakers did at various points mention some of the problems that beset any attempt to respond to these problems. Indeed there are many apparent reasons for pessimism, after all, why should national governments care about international tax avoidance? Each state is interested in attracting investment from abroad and they can use their taxation system as a means to make themselves more attractive. Each state has a national interest in competition.

Furthermore, there are ideological and elite-interest barriers. There has been an ideological shift against taxation in recent decades with the rise of neo-liberal thinking and the view that taxation is an unfortunate thing that gets in the way of market outcomes. Furthermore, the people who make the laws around the world are usually wealthy individuals or depend upon the wealthy elite for political patronage. This means that politicians will generally not act against international loopholes unless they are either very principled or the public pressure is such that they have to.

A final problem, which was mentioned at the conference, is that different countries would have very different interests when it comes to choosing what the tax base should be. Some countries (the UK, US and Germany) would benefit more if the relationship of a company to different states gives great weight to the location of the headquarters. However, other states may benefit from giving more weight to sales or the location of staff.

Nevertheless, I remain optimistic that things will improve. Firstly, many states have agreed to go along with the outcome of the BEPS process, whatever that may be, and the outcome will be presented relatively soon. Some of the speakers expressed doubts that this would be so straightforward; once the outcome is known some countries may realise that the outcome is not to their liking.

Businesses seem unlikely to be keen since they are usually run by the wealthy for the wealthy. However, a point that was made is that businesses require consistency, and the absence of global agreement on business taxation may result in constant changes. Furthermore, states may occasionally seek to generate a substantial amount of revenue by adding a large charge or tax. Businesses may not try to use their influence to undermine global agreements if they believe the alternative might be worse.

Finally, the reason I would suggest that there is hope is that states will prefer an international tax system that provides them with something rather than nothing. If the tax base keeps on being eroded and there are fewer and fewer tax revenues over which states can compete then states will have little to lose by signing up to agreements. The question is then whether the states are acting in favour the wealthy international elite or in the interest of the vast majority of their citizens. Eventually I would expect citizens to get fed up of feeding of the smaller and smaller scraps left by an international class of wealthy individuals who would be increasingly wealthy and increasingly offshore. At some point regular ‘onshore’ people would have little nothing to lose from having a revolution, of whatever kind takes their fancy.

The above points indicate that there are many factors pushing towards and pulling against international tax agreements. This makes it very difficult to predict what will happen and when. I certainly don't plan to guess. However, my feeling is that something will happen, and we can only hope it will be soon and that it will be effective. I have set out my own proposals for a way to tax international individuals, and the approach could be modified to apply to business taxation as well. In my next post I will briefly explain this.