Over at the Standard they are discussing the perceived inequity associated with a shift from a progressive income tax system to a flat income tax system.
This is an issue we have discussed before in this post. In the post we asked “what is the equality-efficiency trade-off” and “is the tax system the best way to redistribute income”.
The first question matters, because if we are reducing growth in the economy sufficiently by redistributing income it may be the case that lower tax cuts are parteo superior – which implies we could say they were better without having to make any assumptions (apart from the assumption that people prefer more). Even if the efficiency gains are not that strong it does imply that less than 78% of the population (the figure that the Standard states) will have a higher tax bill.
The second question matters as even if we are in a situation where a certain set of value-judgments implies that redistribution is optimal, there may be a better may to do it than through a progressive tax system.
Now even ignoring those two points we have the issue that “fairness” is a value-laden concept.
We can view the fairness argument by taking the Standards value judgment:
What’s fair about putting up tax on 78% of Kiwis to give a massive tax cuts to the few most wealthy?
And rewording it, such that:
Is it fair to make 22% of Kiwi’s shoulder a greater than proportional share of the provision of public services for everyone?
Note that the same amount of tax is being payed – so the lower taxes for 78% of the population are being paid for directly by another 22% – this isn’t necessarily fair.
Furthermore, calling this 22% of the population “wealthy” is just plain wrong – just because you have earned a high annual income does not mean you are wealthy. E.g. Farmers have many low income years, but they certainly hold onto a lot of wealth.
Another point to remember is the “incidence of tax” issue, and the fact that a change in the tax system would lead to a change in wages. If low skilled labour are those on low incomes, then firms will attempt to pay them their reservation wage. If tax goes up on these workers, the firm still has to pay the reservation wage – and so gross wages rise to keep net wages constant.
In this case, the burden of the tax actually falls on the owner of capital, not on the employee, and so these people will not be made worse off by an increase in income taxes on the poor – the business owner will be.
One further issue is the level of spending – however, that is an issue I’m not going to discuss at present 🙂