Tuesday, 12 May 2009

Taxing Questions

Kevin Drum makes a very good argument regarding cap-and-trade versus carbon tax; the proponents of carbon tax can pretend their option has no loop-holes or unnecessary complexities precisely because they haven't gotten anywhere with it. Specifics only matter once the general concept has been accepted, or at least gotten somewhere near being accepted.

I'm not sufficiently up on the specifics to be sure Drum is right, but it's a very persuasive argument, and it's a reminder that a good plan poorly implemented is far better than a perfect plan that can never be implemented at all. This is something Liberal Democrats in this country and progressives in general should remember, to ensure that we don't keep fighting imperfect plans because we imagine a vastly superior alternative that will never occur anyway, at least without dilution to the point that it isn't much better in any case.

In short: anyone can promise they'll heal the sick upon election if they know they'll never, ever win.


Tom said...

This whole debate is as academic as arguing whether income tax is better than VAT - by any reasonable standard income tax is the better option, but VAT is stealthier so it's bound to be preferred by politicians. Same with cap-and-trade.

And, of course, in the end we'll get both (in the UK we already do have both in a way, with the EU ETS and the Climate Change Levy).


Senior Spielbergo said...

One advantage VAT does have, or at least should in theory have, is that it costs quite a lot less to administrate than Income Tax. Therefore for the same amount of tax taken off the people, a greater proportion of it gets to be spent on useful things, rather than administrating it and enforcing it. Admittedly in your country the VAT system is rather more complex and thus the savings are not as pronounced as they could be (our very simplistic GST system is remarkably efficient purely in terms of tax revenue compared to administrative and enforcement costs).

Tom said...

I think the main advantage of VAT is that it's quite difficult to evade completely, so the proverbial builder might do his jobs cash in hand but if he does he won't be able to claim back the VAT on his materials.

Maybe VAT does cost less to administrate, but if you have both taxes that must be the worst of both worlds?


Senior Spielbergo said...

“Maybe VAT does cost less to administrate, but if you have both taxes that must be the worst of both worlds?”

That’s a good question, and I’m not sure if I can give a definitive answer. I mean logically you would assume that a 23% income tax should cost no more to administrate than a 20% income tax as the only difference is the amount collected, however I have a sneaky suspicion that it is not quite as simple as that, and it is probably due to the fact that as you increase a tax rate the associated enforcement costs will go up. The higher the tax the less willing people are to pay it. Whether or not it turns out that these increased costs off set the costs of administrating a separate but cheaper to administrate tax, I have no idea.

The other obvious benefit of VAT type systems is as you say it is very difficult for people to avoid in its entirety and therefore expands the tax basis in quite a useful way. You up income tax and people will ensure they personally receive less income, and likely arrange their general affairs through a corporation. Up corporation tax in response and people are likely to structure their affairs so that they receive their funds via capital gains. Up capital gains taxes then you get Trust structures and the like in Off Shore Domiciles, and so on. VAT however has the advantage that sooner or later even your most devious tax avoider is going to have to buy stuff in one way or another… Well maybe if they really, really don’t like paying tax they could set up a Subsistence Farming Industry… Probably one held in an offshore Trust…