Evan Soltas has written a number of pieces on income tax/deficit volatility that are excellent but I think his conclusions on income tax get away from him a bit as there is a larger picture to consider.
When setting a tax code, the primary concern of government is not tax receipt volatility but rather the generation of tax incomes and the effect of that taxation on the economy. Tax receipt volatility is a concern but is a secondary one, and is not a concern during boom years (as there is no volatility).
Once that frame of reference is placed on the question I think we see a slightly different issue. Let's play it out.
We'll assume that there is high pre-tax income equality (which also happens to be true for Evan in the US and me in the UK). And we'll also assume that the government is ignoring my two main concerns and focusing squarely on minimising tax receipt volatility. Applying Evan's analyis, it appears they're going to do this by levelling out income tax rates (we're going to come back to this).
So the secondary issue of income tax volatility is resolved, but what about my two "major" concerns - total tax receipts and effect on the economy?
If we first assume that the government wishes to maintain the same level of revenue following a levelling out of the income tax rates, we're either going to see: (i) a reduction on the rate of taxation on high earners and and increase on low and mid-income earners; or (ii) a reduction on taxation on high earners + some other taxation; or (iii) some mixture of the two.
On (i) that's going to hit consumption of those two groups pretty hard, as to rebalance the share of income tax revenues generated by high earners is going to take a far greater increase in taxation on low and mid-income earners.
On (ii) I'm not sure what taxation would be appropriate? I expect consumption to be similarly volatile to income for high income earners (and untargetted consumption taxes are regressive) and corporation tax/cap gains isn't going to help as these two figures are just as volatile as high-earner incomes.
Because I don't see (ii) being effective, I don't see (iii) working out either, as it ends up just being (i).
My feeling then is that to not cause unwanted effects of such a change in consumption economy, you're going to have to accept less tax revenue as a trade off for less volatility. If tax revenues fall and we don't see a spending adjustment (and if anything I'd advocate an increase in current spending to boost demand), the deficit increases.
I'm not a deficit hawk, in fact I don't think government debt is a particularly major issue in the UK or US right now - especially compared to the severity of the threat posed by the recession. And for that reason I don't mind the deficit swelling during the recession. But the only reason I'm happy with it is because I know that if I keep my volatile tax code the same (bar any reduction to stimulate growth), when we hit growth again, those same high earners that are not paying up right now, will return to their normal levels. But if you don't have that uplift when growth returns, I'm not sure how Evan is going to get rid of the deficit he's growing.
In fact, when the economy is experiencing sustained growth, the government is (or should be) aware that income tax revenues will be volatile if we enter recession. Armed with that knowledge, the question is not tax policy but spending policy. The government knows it will have less revenue at some point in the future and so should hold back spending during growth years - it should run a surplus. A failure to run a surplus is what causes the problems with volatility, not the volatility itself.
All of this is said with (a) a lot of respect for Evan's excellent blog and (b) a lot of humility as someone who is equally a student of the subject.
When setting a tax code, the primary concern of government is not tax receipt volatility but rather the generation of tax incomes and the effect of that taxation on the economy. Tax receipt volatility is a concern but is a secondary one, and is not a concern during boom years (as there is no volatility).
Once that frame of reference is placed on the question I think we see a slightly different issue. Let's play it out.
We'll assume that there is high pre-tax income equality (which also happens to be true for Evan in the US and me in the UK). And we'll also assume that the government is ignoring my two main concerns and focusing squarely on minimising tax receipt volatility. Applying Evan's analyis, it appears they're going to do this by levelling out income tax rates (we're going to come back to this).
So the secondary issue of income tax volatility is resolved, but what about my two "major" concerns - total tax receipts and effect on the economy?
If we first assume that the government wishes to maintain the same level of revenue following a levelling out of the income tax rates, we're either going to see: (i) a reduction on the rate of taxation on high earners and and increase on low and mid-income earners; or (ii) a reduction on taxation on high earners + some other taxation; or (iii) some mixture of the two.
On (i) that's going to hit consumption of those two groups pretty hard, as to rebalance the share of income tax revenues generated by high earners is going to take a far greater increase in taxation on low and mid-income earners.
On (ii) I'm not sure what taxation would be appropriate? I expect consumption to be similarly volatile to income for high income earners (and untargetted consumption taxes are regressive) and corporation tax/cap gains isn't going to help as these two figures are just as volatile as high-earner incomes.
Because I don't see (ii) being effective, I don't see (iii) working out either, as it ends up just being (i).
My feeling then is that to not cause unwanted effects of such a change in consumption economy, you're going to have to accept less tax revenue as a trade off for less volatility. If tax revenues fall and we don't see a spending adjustment (and if anything I'd advocate an increase in current spending to boost demand), the deficit increases.
I'm not a deficit hawk, in fact I don't think government debt is a particularly major issue in the UK or US right now - especially compared to the severity of the threat posed by the recession. And for that reason I don't mind the deficit swelling during the recession. But the only reason I'm happy with it is because I know that if I keep my volatile tax code the same (bar any reduction to stimulate growth), when we hit growth again, those same high earners that are not paying up right now, will return to their normal levels. But if you don't have that uplift when growth returns, I'm not sure how Evan is going to get rid of the deficit he's growing.
In fact, when the economy is experiencing sustained growth, the government is (or should be) aware that income tax revenues will be volatile if we enter recession. Armed with that knowledge, the question is not tax policy but spending policy. The government knows it will have less revenue at some point in the future and so should hold back spending during growth years - it should run a surplus. A failure to run a surplus is what causes the problems with volatility, not the volatility itself.
All of this is said with (a) a lot of respect for Evan's excellent blog and (b) a lot of humility as someone who is equally a student of the subject.
No comments:
Post a Comment