What Would Happen If Ultra Low Taxation Were Adopted

[lets get it right]

I have been reading some stuff on some sort of 'Tea Party' movement in the States - and its movement to the UK. Some mob have set themselves up and allied themselves with the Taxpayers' Alliance.

This lot are described as 'ultra right wing'. Leaving aside the various nasty connotations that the words 'ultra right wing' bring to mind, what would happen if their central financial tenet - low taxation - was put into place?

What would happen if, for example, income tax was cut to 10p across the board (no higher rate).

Obviously your first instinct would be that government could not function without the tax revenue that would be lost. But, how much would be lost?

If people found themselves with somewhere between another couple of hundred and a thousand pounds a month extra in their paypackets, what would happen? My thoughts are that there would be huge increase in demand for everything. People would think they'd won the pools - they'd be out for meals, off for the week-end, extra holidays, new cars, new tellies - etc etc. You would have a consumer boom without the increase in debt. Every penny spent would create demand and jobs. Every job created would create more demand etc. Every time money is spent tax is charged (VAT and tax on profits) so some of the lost tax would find its way back to the exchequer.

IF a way could be found to prevent people from spending their suddenly increased take home pay on servicing bigger mortgages - i.e. strict lending controls, rigidly enforced so that the only boom you got was in spending, not borrowing - surely, after a couple of years, tax revenues overall would increase as the velocity of money around the economy increased.

I guess a side product would be some inflation but globalization ought to take care of some of that pressure and a bit of moderate inflation would get the debts paid down more easily.

[ken_ichikawa]

I have been reading some stuff on some sort of 'Tea Party' movement in the States - and its movement to the UK. Some mob have set themselves up and allied themselves with the Taxpayers' Alliance.

This lot are described as 'ultra right wing'. Leaving aside the various nasty connotations that the words 'ultra right wing' bring to mind, what would happen if their central financial tenet - low taxation - was put into place?

What would happen if, for example, income tax was cut to 10p across the board (no higher rate).

Obviously your first instinct would be that government could not function without the tax revenue that would be lost. But, how much would be lost?

If people found themselves with somewhere between another couple of hundred and a thousand pounds a month extra in their paypackets, what would happen? My thoughts are that there would be huge increase in demand for everything. People would think they'd won the pools - they'd be out for meals, off for the week-end, extra holidays, new cars, new tellies - etc etc. You would have a consumer boom without the increase in debt. Every penny spent would create demand and jobs. Every job created would create more demand etc. Every time money is spent tax is charged (VAT and tax on profits) so some of the lost tax would find its way back to the exchequer.

IF a way could be found to prevent people from spending their suddenly increased take home pay on servicing bigger mortgages - i.e. strict lending controls, rigidly enforced so that the only boom you got was in spending, not borrowing - surely, after a couple of years, tax revenues overall would increase as the velocity of money around the economy increased.

I guess a side product would be some inflation but globalization ought to take care of some of that pressure and a bit of moderate inflation would get the debts paid down more easily.

HK has an across the board 16.5% income tax, sometimes less, thing is it all goes on property prices though as the price of property is insane. Though consumerism is absolutely rampant, though this might be because there is bog all to do in HK no matter what people say. Unless you like hiking and or swimming.

[matroskin]

I have been reading some stuff on some sort of 'Tea Party' movement in the States - and its movement to the UK. Some mob have set themselves up and allied themselves with the Taxpayers' Alliance.

This lot are described as 'ultra right wing'. Leaving aside the various nasty connotations that the words 'ultra right wing' bring to mind, what would happen if their central financial tenet - low taxation - was put into place?

What would happen if, for example, income tax was cut to 10p across the board (no higher rate).

Obviously your first instinct would be that government could not function without the tax revenue that would be lost. But, how much would be lost?

If people found themselves with somewhere between another couple of hundred and a thousand pounds a month extra in their paypackets, what would happen? My thoughts are that there would be huge increase in demand for everything. People would think they'd won the pools - they'd be out for meals, off for the week-end, extra holidays, new cars, new tellies - etc etc. You would have a consumer boom without the increase in debt. Every penny spent would create demand and jobs. Every job created would create more demand etc. Every time money is spent tax is charged (VAT and tax on profits) so some of the lost tax would find its way back to the exchequer.

IF a way could be found to prevent people from spending their suddenly increased take home pay on servicing bigger mortgages - i.e. strict lending controls, rigidly enforced so that the only boom you got was in spending, not borrowing - surely, after a couple of years, tax revenues overall would increase as the velocity of money around the economy increased.

I guess a side product would be some inflation but globalization ought to take care of some of that pressure and a bit of moderate inflation would get the debts paid down more easily.

Russia has a flat-rate income tax at 13%, among the lowest in G8. However, the tax collection service in Russia is one of most efficient and ordinarily exceeds the govt targets. Cue M.Khodorkovsky who serves time for not paying his taxes.

But the disparity between Russian rich and poor is also among the greatest.

Wealth has a tendency to concentrate and taxation is redistribution of wealth - less tax, more wealth is concentrated in the hands of the few, unless B.Gates idea of sharing wealth becomes widespread among billionaires (and millionaires too)

[EdiLass]

If tax were cut, lots of things could happen other than people spending more.

Employers might cut workers hours so there were less redundancies but no one much saw an increase in their pay packet

Even if people saw more money coming in they might use it to over-pay their mortgage

People might start saving again or paying into pensions

[Authoritarian]

You've answered your own question LGIRTT, if ultra low taxation were adopted the excess would find it's way into house prices.

This can easily be proven too. Lower taxation would have the same impact as higher productivity on wage packets, essentially workers would find themselves with more money in their pockets each month. What happens in areas that are very productive in this country, like London for example, where people are capable of earning much more than those on the margins? House prices rise to choke off the surplus income.

You can attempt to combat this with a domestic form of capital controls, but the upshot is that home ownership would probably become the preserve of the rich as working people were denied the means to purchase their own land.

Edited September 19, 2010 by Chef

[Executive Sadman]

Yes, BBC look east described the TPA as 'right wing' last time they had them on.

As if somehow expecting value for money from your taxes is 'right wing'

[alexw]

I have been reading some stuff on some sort of 'Tea Party' movement in the States - and its movement to the UK. Some mob have set themselves up and allied themselves with the Taxpayers' Alliance.

This lot are described as 'ultra right wing'. Leaving aside the various nasty connotations that the words 'ultra right wing' bring to mind, what would happen if their central financial tenet - low taxation - was put into place?

What would happen if, for example, income tax was cut to 10p across the board (no higher rate).

Obviously your first instinct would be that government could not function without the tax revenue that would be lost. But, how much would be lost?

If people found themselves with somewhere between another couple of hundred and a thousand pounds a month extra in their paypackets, what would happen? My thoughts are that there would be huge increase in demand for everything. People would think they'd won the pools - they'd be out for meals, off for the week-end, extra holidays, new cars, new tellies - etc etc. You would have a consumer boom without the increase in debt. Every penny spent would create demand and jobs. Every job created would create more demand etc. Every time money is spent tax is charged (VAT and tax on profits) so some of the lost tax would find its way back to the exchequer.

IF a way could be found to prevent people from spending their suddenly increased take home pay on servicing bigger mortgages - i.e. strict lending controls, rigidly enforced so that the only boom you got was in spending, not borrowing - surely, after a couple of years, tax revenues overall would increase as the velocity of money around the economy increased.

I guess a side product would be some inflation but globalization ought to take care of some of that pressure and a bit of moderate inflation would get the debts paid down more easily.

Complete nonsense tbh.

Tax functions as a redistribute mechanism. So that when tax is paid it is given to the less well off and government workers as income. If less tax is paid these groups are either made unemployed or have less income. Thus the gain of some is balanced by the loss of others. Moreover a reduction of tax would tend to be a redistributive mechanism upwards. Given that the richer you are the less as a proportion of your income you tend to spend, the changes you mooted would result in a large net loss in demand rather than what you proposed, which is the complete opposite.

The gain made by the well off of such changes would as chef said find its way into asset prices - in large part housing.

Edited September 19, 2010 by alexw

[easy2012]

You've answered your own question LGIRTT, if ultra low taxation were adopted the excess would find it's way into house prices.

This can easily be proven too. Lower taxation would have the same impact as higher productivity on wage packets, essentially workers would find themselves with more money in their pockets each month. What happens in areas that are very productive in this country, like London for example, where people are capable of earning much more than those on the margins? House prices rise to choke off the surplus income.

You can attempt to combat this with a domestic form of capital controls, but the upshot is that home ownership would probably become the preserve of the rich as working people were denied the means to purchase their own land.

Think this is over simplifying things. Taxation did not exceed 10% before 1920 or so and we didn't quite have these super property bubble either. High tax Canada, Australia have them. Saudi Arabia, Qatar, Kuwait, Brunei has 0% tax and things aren't as crazy as London.

Ultra low tax is probably not good, ultra high tax isn't good either. There is an optimal tax rate which varies from countries to countries. I think how high the tax can go depends on how fairly each of the citizen behaves to each others. I am happy to live in a utopian communist state where nobody cheats. On the other hand, if I am the only one working while others are leeching off my production, then I think even a 5% tax is too much. With the high level of abuses in UK public sector ( benefits, as well as how the mangers of the civil servants treat each others and their suppliers...), think we are paying far too much tax here.

Something I spotted (I don't agree with them, but it is worth looking at other side of the fence in the process of seeking the truth) on a left wing blog (think it is unfair to misuse the word ultra) basically says higher tax is good for well being of the country (!?)

http://www.taxresearch.org.uk/Blog/2010/09/16/more-on-why-youre-better-off-in-a-high-tax-state/

and an interesting comment from one of the commentator:

:

This makes sense. In countries where taxes take a lower percentage of the GDP, rents can take a higher percentage of the GDP (and if they can, they generally will). But whereas governments have, for the most part, to spend tax income via government expenditure or investment within the country, the rentiers are under no such obligation and can choose to transfer the rental income to another country. Hence taxes tend to grow national GDP whereas rents tend to shrink it.

:

[mightytharg]

What would happen if, for example, income tax was cut to 10p across the board (no higher rate).

Obviously it would be great and the economy would thrive. The people saying that it would all go in house prices are wrong since the same philosophy that would want to free us from excessive taxation would also want to free us from the ridiculous restrictions on home building.

Finally those crack-smokers that are saying that taxation is to redistribute wealth from the rich too the poor, don't they realise that most taxation goes to wealthy public-sector workers and rich farmers? Did you ignore all those articles about how overpaid the public sector is compared to the people who actually earn money and pay taxes.

Tax redistributes from the relatively poor and hardworking to the relatively idle rich.

[MarkG]

Obviously it would be great and the economy would thrive. The people saying that it would all go in house prices are wrong since the same philosophy that would want to free us from excessive taxation would also want to free us from the ridiculous restrictions on home building.

Bingo. House prices in the UK are high because the government deliberately keeps them that way by preventing people from buying a piece of land and building on it... eliminate that restriction and there's nowhere near enough money to cover the country with 'executive apartments' at 500k apiece.

[interestrateripoff]

You'd get charged a fortune for healthcare like in the US.

Instead of the nasty govt fleecing you instead it would be the big caring corporations robbing you blind all in the name of profit.

[MarkG]

You'd get charged a fortune for healthcare like in the US.

If the NHS is so wonderful, then it could be privatised and continue to offer its wonderful services in return for charging you 10% of your income.

[david m]

This country doesn't require a very low rate of tax, say 10%.

What it does need is a lower flat rate of tax, say 25%, applied to all income, capital gains, corporation tax etc etc.

Much harder to arbitrage, fairer, easier for companies/individuals to manage ... and would allow us to dispose of 90% of HMRC staff ... what a shame.

[Peter Hun]

If the NHS is so wonderful, then it could be privatised and continue to offer its wonderful services in return for charging you 10% of your income.

They would charge 20%, doctors would need multi million pound pay checks and drug prices would double, like the US.

You can criticise the NHS, but its far better value than the US healthcare, UK pays under 8% of GDP against the US's 15-18% of GDP. Thats only for covering three quarters of the population as well.

What it does need is a lower flat rate of tax, say 25%, applied to all income, capital gains, corporation tax etc etc.

Much harder to arbitrage, fairer, easier for companies/individuals to manage ... and would allow us to dispose of 90% of HMRC staff ... what a shame.

How on earth do you figure out that a single rate of tax would be simpler and require less people ? Tax inspectors don't sit there adding up figures on paper

Edited September 19, 2010 by Peter Hun

[MarkG]

They would charge 20%, doctors would need multi million pound pay checks and drug prices would double, like the US.

Drug prices and doctors' salaries are both high due to government regulation. Eliminate the artificial restrictions on the medical marketplace, and prices would collapse.

Doctors' salaries in the UK were much lower before the government started getting into the medical business; I believe one of the ways the NHS was sold to doctors was by promising them higher salaries. Why would anyone imagine that they would be paid more if the government got out of the way and restrictive practices that artificially reduce the supply of doctors were eliminated?

You can criticise the NHS, but its far better value than the US healthcare, UK pays under 8% of GDP against the US's 15-18% of GDP. Thats only for covering three quarters of the population as well.

US healthcare is expensive because of government intervention, and because American hospitals spend a lot of money keeping very sick people alive when the NHS would just let them die; most of the average American's healthcare expenses occur in the last few weks of their life.

So claiming that it shows the faults of the EVIL FREE MARKET is simply laughable.

[Georgia O'Keeffe]

Drug prices and doctors' salaries are both high due to government regulation. Eliminate the artificial restrictions on the medical marketplace, and prices would collapse.

Doctors' salaries in the UK were much lower before the government started getting into the medical business; I believe one of the ways the NHS was sold to doctors was by promising them higher salaries. Why would anyone imagine that they would be paid more if the government got out of the way and restrictive practices that artificially reduce the supply of doctors were eliminated?

US healthcare is expensive because of government intervention, and because American hospitals spend a lot of money keeping very sick people alive when the NHS would just let them die; most of the average American's healthcare expenses occur in the last few weks of their life.

So claiming that it shows the faults of the EVIL FREE MARKET is simply laughable.

a finer example of govt interference and unintended consequences you will never find, im not sure why the US is always trumpeted as the only example of private health care in the world, we have very reasonable private and public healthcare costs here and a great service, it makes the NHS look like the blackhole it is

Edited September 19, 2010 by Tamara De Lempicka

[blankster]

If tax were made very low people would be a bit better off for a while. But then they'd notice that the luxury of their new BMW doesn't make up for the roads getting bumpier and bumpier, that their children's state education seems to be going further down the pan, that their elderly parents can't the standard of medical treatment they need. When the new BMW (but with worn suspension bushes) gets stolen, the police say that they no longer deal with car thefts as they don't have the resources.

[EUBanana]

If tax were made very low people would be a bit better off for a while. But then they'd notice that the luxury of their new BMW doesn't make up for the roads getting bumpier and bumpier, that their children's state education seems to be going further down the pan, that their elderly parents can't the standard of medical treatment they need. When the new BMW (but with worn suspension bushes) gets stolen, the police say that they no longer deal with car thefts as they don't have the resources.

Isn't most of the above happening right now with the highest taxation we've ever had?

[Inca]

US healthcare is expensive because of government intervention, and because American hospitals spend a lot of money keeping very sick people alive when the NHS would just let them die; most of the average American's healthcare expenses occur in the last few weks of their life.

evidence for this claim? Direct compariative studies? or just talking out of your ****?

American healthcare is expensive for lots of reasons - one primary one being the legions of people that are employed by healthcare companies to prevent people from accessing healthcare.

[Saberu]

HK has an across the board 16.5% income tax, sometimes less, thing is it all goes on property prices though as the price of property is insane. Though consumerism is absolutely rampant, though this might be because there is bog all to do in HK no matter what people say. Unless you like hiking and or swimming.

Yeah HK is boring and expensive. I think the only thing not expensive in HK is hookers, or so I hear. There must be rampant demand for hookers in HK due to the girls there being so career minded.

It may also be the case in Hong Kong that men are more traditional than mainland Chinese men, for example they might follow old British values of having a wife and no other girlfriends where the mainlanders would have a wife and many girlfriends. This would lower demand for 'bought' girlfriends so force more girls into prostitution.

This is why I'd rather live in Tokyo than China, the girls have more depth to them.

On the topic of ultra low taxation, in the short term at least it would lower tax intake and we wouldn't be able to pay benefits to the unemployed. First the government need to get jobs back into the country, keep immigrants out then once unemployment had been reduced significantly they could afford a 20% flat rate of tax, then raise the tax free allowance to 10,000 pounds/ year so that you don't have to pay much tax if you are on minimum wage.

Alternatively we could do what I suggested in another thread, give everyone of working age a citizens income of 500 pounds/ month to replace the current benefits system. With an extra 100 pounds/ month if you are a single parent. Then abolish minimum wage but also keep most immigrants out, then unemployment would drop and tax intake would increase as more value added work will be done.

This would make the benefit system fair for all, instead of those with children getting most of the money and those on JSA getting very little, those in work getting nothing- everyone gets the same. It would only cost 15% more than the current benefits bill.

And unlike the current benefits trap, people with a citizens income would have a big incentive to go out and get a job in order to double their income from 500 to 1000/ month, assuming wages at the minimum end dropped to around 500/ month.

I don't think many people would be happy just having 500 per month to live on, especially if you consider unemployment can be depressing so many of these people would like to have a job.

Honestly how many people on this forum, or indeed in British society would NOT benefit from such a system? It would be very few people, mainly those who are currently milking the system for outrageous amounts like 30k/ year.

[lets get it right]

Complete nonsense tbh.

Tax functions as a redistribute mechanism. So that when tax is paid it is given to the less well off and government workers as income. If less tax is paid these groups are either made unemployed or have less income. Thus the gain of some is balanced by the loss of others. Moreover a reduction of tax would tend to be a redistributive mechanism upwards. Given that the richer you are the less as a proportion of your income you tend to spend, the changes you mooted would result in a large net loss in demand rather than what you proposed, which is the complete opposite.

The gain made by the well off of such changes would as chef said find its way into asset prices - in large part housing.

When the Tories came into power in 1979 the basic rate of income tax was 33p in the pound. It was progressively moved down to 22p (as far as I can remember). This caused a consumer boom and lots of growth after a recession in the early 80s (hangover from Labour's disastrous efforts in the late 70s). Unfortunately credit was deregulated and a lot of the money found its way into the housing market - causing a boom and bust - and a recession in the early 90s.

What would happen if you could stop that money going into the housing market?

My 'argument' (and it's not an argument really, just a bit of musing) is that if you lower taxes and people spend more money - you'll get the same amount of tax in and you can employ the same size public sector and redistribute money to those that need help etc.

I guess what is more likely to happen is that employers would drive down wages if taxes were lowered.

[Chicken]

there is bog all to do in HK no matter what people say.

Ken, you're doing it wrong!!!!

[Chicken]

If the NHS is so wonderful, then it could be privatised and continue to offer its wonderful services in return for charging you 10% of your income.

Like it! Could we call it something like "National Insurance"?

[interestrateripoff]

evidence for this claim? Direct compariative studies? or just talking out of your ****?

American healthcare is expensive for lots of reasons - one primary one being the legions of people that are employed by healthcare companies to prevent people from accessing healthcare.

Isn't another reason the US legal system because it's so easy for the doctor to be sued so they have to cover everything in the tests just in case they miss something?

[Pindar]

The answer is for there to be a progressing reduction on income tax with a corresponding increase in consumption tax - including home "ownership". This would have the effect of moderating the flow of money into housing and provide an incentive for people to save some of their earnings or invest it in new businesses, creating jobs and productive capacity.