Tuesday, October 11, 2005

An Accountant Does Not Like Flat Tax!

William Lucie-Smith, an accountant, writing in the Trinidad & Tobago Express - Port-of-Spain, Trinidad and Tobago, on Monday, October 10th 2005 asks is ‘Our Taxation System Fair?. He thinks not and argues against a flat-tax:

“The basic principles of taxation have not changed much since Adam Smith enunciated them in 1776 in his seminal work The Wealth of Nations. Smith gave four basic "canons'' of taxation-equity, certainty, convenience and efficiency.”


Adam Smith in “Wealth of Nations” reported on four “maxims” (not “canons”!), which had been recommended "more or less to the attention of nations” (WN V.ii.b.7: p 827). In short the four maxims were not devised by Adam Smith and the myth that they were probably came from the same source of second-hand lecture notes Mr Lucie-Smith uses that miscalls them as his “canons”.

“The principle of equity, has over the years been accepted to mean that tax systems should be progressive i.e. individuals should bear a greater burden the more they are able to pay it by reason of their income or their wealth.”


The problem is that the ‘principle of equity’ when unconstrained leads in practice to steeply rising proportions of taxation that have different and decidedly unhelpful side-effects that lead to the growth of a secondary industry in taxation advisers, consultants and experts who add to collection costs, but not to wealth creation, and are heavily populated by, er, accountants (of which profession, Mr William Lucie-Smith, is a member).

Having recounted past taxation policy in Trinidad and Tobago, Mr Lucie-Smith describes the problem created by the slavishly following the ‘principle of equity’:

“income tax rose to 70 per cent, corporation taxes (including unemployment levy) were 50 per cent. These taxes also included taxes on dividend income and interest income that are now exempt. Clearly the burden of tax was far too high and as a result was a major deterrent to both economic growth and savings. Together with a shortage of foreign exchange this contributed to capital flight.”


Yes, indeed Mr Lucie-Smith. The past tells you where you are going if you revert to the same taxation policies. All governments in history, I can think of few if any exceptions, resort to increasing taxation rates, with spurious but credible arguments in their favour at the time (there is nothing like crying “equity!” for electoral success, though it leads to economic failure).

Do you see the connection between highly progressive tax rates, high corporation taxes, high dividend taxes and poorer economic performance. Of course you do: you identify them as a “deterrent to both economic growth and savings … and capital flight”. Then why on earth do you propose more of the same!

Mr Lucie-Smith continues:

“The flat income tax treats the billionaire and working man the same way.”


True but that is not the end of it. A billionaire earning $10 million at the proposed flat tax of 25% pays $2.5 million in income tax; a working man earning $10,000 pays $2,500 in income tax. They pay the same proportion but not the same amounts.

Moreover the consequences for the economy are also different. The income tax is nominally paid by the working man – it is actually charge on employing labour, because the net income of the working man is what counts and if that drops too low he likely will not continue working, preferring ‘unemployment’ to working at ‘starvation’ wages; the billionaire’s income tax is paid by her entrepreneurial businesses and at a flat tax she has every incentive to increase her business activities; to invest in new enterprises, not consume it, and to increase her savings and to bring her overseas income back to Trinidad and Tobago (reversing capital flight). She might also dispense with the tax avoidance (even evasion) advice of accountants.

I would suggest that in our economy a more progressive system is required in which higher incomes are charged at higher rates. I certainly do not think the flat 25 per cent tax is fair and would have liked to see a higher basic allowance, but maintenance of the 30 per cent range for higher incomes.”


Of course you would Mr Lucie-Smith. Calling a flat tax ‘unfair’ gives you a free pass to your colleagues' earnings from giving tax advice to beleaguered billionaires, which they are guaranteed if the government adopts your progressive tax policies, and to continue earning for bigger fees as the tax rate rises back towards 70 per cent.

Fine. I have nothing against you making a living for your colleague (persish the thought that you would be enaged in such activities), and if the people of Trinidad and Tobago vote for it, that is their right and their business, not mine.

Meanwhile, please desist from associating these policies with Adam Smith. He was more interested in growing real wealth, measured by the annual production of goods and services, raising real wages, and spreading opulence to the common poor, that stuffing the rich, slowing down the economy and causing capital flight (and lucrative work for tax advisors)


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