AT our last meeting there was disagreement between those who argued for progressive tax and those (well mainly Richard) who argued for a flat rate tax. The problem was that none of us had any hard evidence to hand except half-remembered stuff that we had read and stored away. Most of us argued that a flat rate tax would disproportionately hit the least well off, which is probably analytically true. But Richard argued that in a competitive world businesses are more likely to flee from high tax nations to low tax ones, causing economic problems for the former, and that what we really needed was fairer wages. So, what is the evidence?
I recalled at the time that Thomas Piketty in his seminal work Capital in the 21st Century argues that the top optimal tax rate could be above 80 per cent (p512) and his research is here. It is important to note, however, that the aim here would not be to bring in much more revenue but to dampen down high level remuneration.
However, this conclusion is contradicted by a paper by Stephen Moore et al entitled 1,000 People a Day: Why Red States Are Getting Richer and Blue States are Poorer. He argues that low tax (and I assume that flat rate tax would be included), small government and less regulated states do better economically than those that have higher progressive tax, bigger government and more regulation. It does seem to be true that Red states (Republican) seem to be doing better than Blue states (Democrat). But the question then arises is this only because of low taxes etc or are there other reasons? And a quick search reveals that although low taxes do appear to be one reason for Red state success it is not the only one. Others include jobs and the gas boom that has helped turn Texas, for example, into an ‘economic juggernaut’. So the position is rather more complex than Moore suggests.
A more nuanced approach is given in a paper called Pros and Cons for the US of Flat v Progressive Taxes in which the author says that both approaches have their advantages and should not be dismissed, although comes down in favour of a progressive tax for various reasons.
I’m not sure where this leaves our debate but maybe any future discussion would have some evidence base to it. Has anyone else found any interesting material relating to this issue?