‘Fair taxation’ is a hot news item these days following Osborne’s March 2012 budget which scrapped the 50p marginal rate on the rich and further shifted the tax burden to the ordinary citizen (with a bit of bad news for ‘grannies’ thrown in). It cannot have escaped the attention of the judicious reader that the Chancellor’s claim that the 50p rate raised negligible revenue rested on the dubious assessment by the tax service (HMRC) that the total revenue raised by the 50p rate, originally projected to be nearly £3bn per annum, was suddenly reduced to £900mn the day before Osborne’s budget.
As pointed out by various commentators—see for example the piece by Howard Reed —either HMRC is just plain wrong, or even if HMRC is right and the marginal rate encourages massive tax avoidance, the answer is surely to close the avoidance loopholes rather than to scrap the tax. Labour’s Rachel Reeves, speaking on the BBC’s Newsnight immediately after the budget, seemed quite unable to get over this simple message.
But it’s not just in Britain that tax is an issue. Across the channel in France, the left’s presidential candidate François Hollande has promised that he will crack down hard on tax avoidance (limited to €10,000 p a) and raise the Marginal Tax Rate (MRT) to 75% on incomes above €1mn per annum. Although the distribution of household income in France is more egalitarian than in Britain, France has its ‘super rich’ just like here, and they use many of the same tricks to remit a lower percentage of income to the state than their cleaners. And as Monsieur Hollande has made clear on numerous occasions, in contrast to his Labour Party homologues, he has little time for the super-rich.
It is be worth recalling that one of the world’s leading young economic experts on income distribution and taxation is Thomas Piketty of L’École d’économie de Paris (EEP)–the Paris School of Economics as it is known in English. Picketty, together with Emanuel Saez in the USA, published a ground-breaking study a decade ago showing that the distribution of income in the United States had returned to levels of inequality not experienced since before the First World War (Piketty and Saez , 2003). Unsurprisingly, he supports the French left’s radical position on taxation.
Indeed, Picketty has recently made two decisive contributions to the debate. The first is an empirical study of OECD tax data which, inter alia, demolishes the easy assumption made by London’s Institute of Fiscal Studies’s (IFS) Mirrless Report that any marginal tax rate higher than 46 per cent would actually reduce total tax revenue. Economists call this number the ‘tax efficiency elasticity’ (TIE) —roughly equivalent to the ‘peak’ of the infamous Laffer curve—and the number 0.46 was quickly picked up by HMRC to justify reducing the 50p rate to 45p. Needless to say, the Mirrless study is based on 1980s data and more recent IFS work suggests the need for serious revision of the number.
Picketty’s work challenges both the empirical and conceptual basis of the TIE; ie, the assumption that higher tax results in lower entrepreneurial effort. His recent publication (Piketty, Saez and Stantcheva, 2011) suggests the TIE really comprises three separate behavioural components: the supply response; the tax avoidance response and the bargaining response. The crux of what Picketty et al argue is that although a high tax rate appears to have little effect on the supply of effort put in (and thus the extra output produced) by top earners, it may lead to strong tax avoidance behaviour—assuming the opportunities for tax avoidance exist. Equally, high rates may lead top earners to adopt superior bargaining strategies which raise their rewards at the expense of us all (while not raising society’s output). In sum, rather than accepting the supply-side argument that high marginal tax rates lead to a fall in output, we would do far better to concentrate on closing tax loopholes and limiting the super-rich’s ability to bargain their way to über-rewards.
Picketty’s most recent work, however, is even more path-breaking. In contrast to the orthodox James Mirrlees, who wants to reduce personal rates and replace company taxation with higher VAT, Picketty and his collaborators have proposed merging personal taxes on income, taxes on wealth and social contributions (contribution sociale generalisée (CSG), the French equivalent of National Insurance) into a single tax regime. [See Landais C, Piketty T and E Saez (2012), Pour une révolution fiscale : un impôt sur le revenu pour le XXI siècle, Paris & Berkeley CA.] In place of marginal tax rates, they propose six tax brackets—the lowest, a flat 2% on individuals earning up to €1,100 gross per month and the highest, 60% on individuals earning in excess of €100,000 gross per month. The table below illustrates the principle.
Source: http://www.revolution-fiscale.fr/la-reforme-proposee/un-nouvel-impot-sur-le-revenu (my translation)
Why have such a tax regime? One answer is to simplify the complications (and multiple loopholes) of the French tax system. But the clincher is fairness; overall tax incidence in France—as in Britain—has become regressive. What the authors propose is a radical return to progressivity. They invite anyone who wants to read the detail and/or to make alternative suggestions to do so on their website. Perhaps it’s time for a similar debate in Britain