public sector

As Tories bicker over a flat tax, here’s why it doesn’t work…

Tory policy chief Oliver Letwin is calling for a ‘flat tax’ rate, according to a Mirror exclusive yesterday.

He was talking in private to a laissez faire think tank, Politeia, and although instantly rebutted by Conservative Party HQ, it has sparked debate about Tory plans to cut tax for the rich, with Ed Balls today arguing the party is ‘champing at the bit’ to slash the top rate to 40%.

But that itself marks a step towards a flat tax, a policy both George Osborne and David Cameron have praised in the past. Left Foot Forward covered the topic last year amid a renewal of right-wing interest in the policy. What is it though?

The policy entails everyone paying the same basic rate – usually touted as around 20 or 30%. But it has two major possible implications.

If it was set at a low rate, it would require enormous further cuts to public services to compensate for tax income plummeting overnight. But if it was set at a high rate, it would require enormous tax rises among the poor to fund an effective tax cut for the rich, i.e. from the 45% top rate down to the 31% that the Institute for Fiscal Studies says would be necessary to maintain current Treasury tax receipts.

So we have two options with the flat tax – Cameron’s ‘permanent austerity’ hailed by neoliberals (an outcome which would hit the poorest hardest), or significant tax rises for low earners, which would also hit the poorest hardest. The flat tax is therefore, as is commonly understood, deeply regressive. Doesn’t take a genius to work it out.

But it’s also verified by several studies. Here’s an analysis of US flat tax plans by income bracket:

Flat tax

Citizens for Tax Justice, based in the US where calls for a flat tax rate are frequent, have therefore determined that the shift would result in ‘enormous tax cuts for the richest five percent of taxpayers’ alongside ‘tax hikes for all other income groups’, while leaving the investment income of the wealthy essentially untaxed.

Moreover, there’s little evidence to suggest it would ‘work’ in the way right-wing advocates say it would. It has only been introduced in some Baltic states and Russia. In the latter, it was hailed as dramatically boosting actual payment of tax, where previously it had been avoided. But according to a London School of Economics report, this coincided with a dramatic boost in tax collecting powers, and sweeping changes to other forms of taxation, a finding confirmed by another 2007 study.

Meanwhile, another key argument for the Flat Tax, ‘simplicity’, has been fundamentally rebutted by a University of Chicago study, which showed that in any complex economy there is no such thing as a ‘simple’ tax system, particularly when companies and individuals can avoid tax at whatever level it is set. The implementation costs for shifting to such a system were also significant.

Even a study by the free market IMF stressed ‘empirical evidence on [flat taxes’] effects is very limited’ although they did find that ‘there is no sign of Laffer [curve]-type behavioural responses generating revenue increases from the tax cut’ – in non-academic terms, cutting tax didn’t stop avoidance or boost productivity and government income.

So with the evidence unclear, or if anything pointing against a flat tax rate, the Tories have a choice to make. They could adopt a policy so right-wing even UKIP have abandoned it, in what would entrench their perception as the party of the rich forever…or they could ‘do the right thing’ for ‘hardworking people’ and drop the ludicrous plans.

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A Bleak Result for Cornwall – Council Votes Through Cuts

Public sector workers in Cornwall were devastated today by the news that the Unitary Council has passed the ’emergency’ budget which will cut the council workforce by over 2,000, despite intense opposition from local people and MK/Lib Dem councillors.

Tory and Independent councillors voted decided to cut local investment by £170m over the next few years with less than 10 minutes of debate and forcing through 7 sections in one block vote. The result will be huge cuts to adult care, libraries, leisure centres, youth centres and jobs. The council coalition voted on almost every amendment over the course of the day with slavish party-line obedience – with Independent councillors voting the same way as the Tories on practically every proposal, leading many to think they misled the electorate (much like the Lib Dems in Westminster) by standing for local office as ‘independent’ when in fact effectively standing as a Conservative.

Most shockingly, the majority of the day’s debate was spent bickering over licenses for lap-dancing clubs in Newquay and the ‘sex shop’ in Truro – both of which are trivial when compared to the scale of council spending cuts.

Also shocking was the fact that the public gallery was initially full during most of the day, yet by the time the final vote on the overall budget came there were fewer than a dozen watching the chamber.

But by far the most disgraceful part of the full meeting was that all 7 sections of the final recommendations to the chamber – i.e. the vote on the budget itself – was pushed through in one vote so the councillors could go home early. I make no exaggeration when I write that. Under pressure from members who had to ‘go home to their families’, the vote was forced through in one motion.

Even an amendment, tabled by Mebyon Kernow councillor Dick Cole,  to investigate the effects of the cuts on lower-income workers was rejected – by one vote.

The only amendment that actually passed was forwarded by Truro Tory Fiona Fergusson, who asked for a Cornwall sports programme to be excluded from the spending review. It is tempting to say it only passed because she is a Conservative, and though the amendment can perhaps be welcomed, it is sickening that a local council with over £120m in reserves and £30m in savings chose to save only one proposed program, despite proposed amendments which asked for sea pools in Bude and Penzance to be spared. Over 6,000 signatures had been collected to rescue the Bude sea-pool, an amount which was patronisingly and fallaciously used to support a Conservative’s claim that ‘local people are embracing the big society’. No, they are asking for you not to abandon a cherished public asset.

Around three of us had been there since 8am, and remained until half 4pm. So it was thoroughly demoralising to see the budget passed with so little discussion, so little consultation, so little truly independent thinking.

Though the protest gathered some support in the morning, with GMB and Unison workers coming together with students and Labour members, it wasn’t enough to turn the vote.

We will fight on. The TUC demo in March next year will see hundreds of thousands taking to the streets in opposition to the cuts. Though this is welcome, it is too late, and we need to continue pressuring representatives in any way possible to oppose the cuts and to switch the burden of responsibility from innocent people to the bankers who caused the financial crisis.

More info on the amendments of the day can be found here.