If yes, which ones?
Should taxes be indexed to inflation?
If yes, which ones?
"One day, we shall die. All the other days, we shall live."
Tax thresholds (ie tax-free allowance, thresholds between rates etc) should be. Ideally wage inflation rather than CPI.
Too often earnings get caught in fiscal drag due to keeping thresholds the same but those on benefits are index-linked which causes a direct and automatic transfer from earners to non-earners.
Originally Posted by Ominous Gamer
Eh, isn't that a bit of a vicious cycle as a host of taxes influence inflation?
Congratulations America
I am specifically thinking of those taxes that are supposed to discourage things or to account for negative externalities.
"One day, we shall die. All the other days, we shall live."
Funny, this is actually part of our constitution: http://translate.google.ch/translate...01%2Fa128.html
The legal term here is "cold progression".
I actually think it is a good idea, but there are always long discussions how to calculate inflation.
"Wer Visionen hat, sollte zum Arzt gehen." - Helmut Schmidt
The taxes should be indexed not to an inflation level - that's arbitrary for pigovian taxes. They should be indexed to a consumption level - i.e. the tax should be raised until consumption/production of the externality drops to the targeted level. It can then be appropriately changed as consumption changes.
For income tax brackets and exemption levels and the like, though, those should be indexed to some form of inflation (CPI, chained CPI, or wage inflation). There's merits to each form.
So your only interested in making sure the tax revenues are raised so the government gets its pennies, not tax thresholds so the taxpayer is treated fairly ... sounds familiar.
Depends upon how the tax is done. A duty (eg x pence per litre etc; switch for localisation) then yes it would normally make sense to adjust for some form of inflation - though as wiggin says which you use (or even something else altogether) varies upon specific circumstances. If the tax is a percentage (20% of sale price) then no because inflation is already automatically accounted for.
I'm of two minds on this. Part of me thinks all income and estate* taxes should be indexed to inflation, as opposed to letting politicians slide more money into their pockets due to natural income growth.
But part of me is against the idea because it takes power away from elected legislatures and throws it into the bureaucracy. It's not hard to imagine a country where legislators set a tax rate, but that rate is corrupted by the, well, corrupt indexing calculations of bureaucrats.
EG, imagine if legislators set a 40% income tax rate, indexed to inflation as determined by the tax collecting agency. That agency is staffed by people who are either ideological or somehow incentivized to collect more than that 40% rate -- they could simply weight their basket of CPI calculations improperly to conjure a 5% inflation rate and slurp up more revenue.
The situation could play-out in the opposite way, with legislators passing a tax increase, but the bureaucracy indexing the annual increase to .1% just to starve the government of revenue.
* Keeping in mind that I think estate taxes (like property taxes) are extremely immoral and stupid.
Benefits (and other costs) are generally linked to inflation, if tax thresholds are also linked to the same rate of inflation then theoretically the government should be neither better nor worse off. Instead taxpayers are automatically worse off and benefit recipients stay the same if one is linked and the other isn't.
Budgets are always set by the legislature, not a bureaucracy. Merely setting the precedent and establishing that they ought to be index-linked does not mean that the government/legislature of the day can't decide to vary it.
Yes, but now the legislature's budget-setting will be dependent on the bureaucracy setting tax brackets for the next year. And it's not that hard to see the benefits-setters using different formulas than the tax-inflation setters.
The status quo is the benefits-getter get an adjustment and the taxpayers get nothing, so the taxpayers are automatically worse off. How is that fair?
In addition to RB's cogent points, Dread, the bureaucrats who calculate inflation numbers have nothing to do with the people who (a) collect taxes or (b) spend taxes. The BLS is fiercely independent, and rightly so.
Erm, either we have different concepts of how inflation is changing taxes or I don't understand it right.
If you set a inflation rate of 5% the taxes are actually going down. If the inflation is set to 0% the taxes stay the same. The only way for bureaucrats to rise the tax is to set a negative inflation.
But this is not going to happen over here because the parliament has to accept the calculated inflation rate of the bureaucrats first, tax rates are not adjusted automatically.
"Wer Visionen hat, sollte zum Arzt gehen." - Helmut Schmidt
eJ, Dread is speaking in real, and not nominal terms. If you overestimate inflation and index your tax rates accordingly, then your thresholds suddenly include more real income than before, probably decreasing revenues. If you underestimate inflation and index your rates, then the thresholds include less real (not nominal) income than before, meaning your overall tax rates have gone up in real terms.
I think I have to make an example and then you can tell me where I go wrong.
So lets say we have 2012 and we have the following tax rates (these are all not realistic values):
10% for < 1000 income
11% for 1000 to 1100 income
12 % for > 1100 income
Now my income is 1050 in 2012. The real inflation is 5% and my income was adjusted accordingly to 1102.50. So I now have to pay 12% tax instead of 11% in the end I get less because my income has only increased nominal but not in reallity.
Now the government adjusts the taxes accordingly to the real inflation the new taxes are:
10% for < 1050 income
11% for 1050 to 1155 income
12% for > 1155 income
Now I have pay the same tax and can buy as many goods as before.
Now if the government decides to set the inflation rate to 11% the new tax plan will be:
10% for < 1110 income
11% for 1110 to 1221
12% for 1332
I will suddenly only pay 10% taxes.
"Wer Visionen hat, sollte zum Arzt gehen." - Helmut Schmidt
eJ, you're right. But do the calculation if the government believes inflation is only 1% when it is actually 5%. You pay higher taxes.
I'm not arguing for the status quo. You both are talking to a person who considers those benefits you mention to be somewhere between a necessary evil to something that should/must be eliminated over time.
However I don't see how you both can miss how indexing taxation would put more power into the hands of the bureaucracy, and how that would chance the incentives and pressure that bureaucracy operates under. We already have some fights in the US over those calculations -- once you increase the value of those calculations to everyone's pocket book, the game will get a lot more intense to game the numbers.
And the calculations will always be rife with controversy. Plus we'll conveniently find the indexing to become very slow during/before election years.
I don't deny that the choice of which indexation to use can be political, and is in fact decided by statute. But the calculations themselves are done by professionals, and I don't think they have much political skin in the game. I would prefer that these calculations be left to an independent bureaucracy rather than politicians, who will mess it up (or come damned close) routinely - just look at the ridiculous annual patch for the AMT because it wasn't indexed. Whenever they get close to the deadline and don't pass it, it leads to yet another mini-crisis. Fortunately our tax brackets are indexed for most things, which saves a gigantic legislative headache every year, and keeps markets from freaking out too much. If there was a clear rule based on an apolitical agency's numbers, I would be much happier.
I recognize and agree with your general concern about abdicating legislative responsibility to an entrenched bureaucracy which is likely to be self-perpetuating. But I don't think this is such a case. Similar to the Fed, I feel that the BLS carries out generally solid and professional work in an apolitical manner. It's better than the Fed, actually, since they don't directly set policy, but rather just provide the numbers which are fitted into a legislated policy.
You're wrong. By indexing the government's expenditure but not income source to inflation you are creating a perverse incentive to game inflation to be as low as possible. That is why we're now talking about Chained CPI - no other reason. There is a perverse benefit to the government if they low ball inflation.
By automatically linked thresholds to inflation would counter that. It would reduce partially that perverse incentive and nudge the government to being more neutral.
Since the government spends more than it takes and basically all expenditure is somehow linked to inflation the incentive if any remains would still be to underestimate but not by as much. The incentive to game the numbers is only there when it matters on one side only (like now) - when it cancels out you reduce the already existing incentive not increase it.
Once again, for the record I don't think it's a good idea to have the government indexing expenditures either. In the US we have enormous chunks of our budget that go up and up every year on autopilot without any real input from legislators. It makes spending too easy.
But I see some real risks with letting the income side also fall to the bureaucracy. It's akin to doubling-down on a bad idea. And, in a federal system like the US, such indexing could add spending power to the executive branch.
But from the time I've spent with these kinds of people, I don't share Wiggin's idea that even the most boring bureaucracies exist in a political vacuum. In fact, some level of political noise infiltrates all levels of these agencies. We hope for (and often receive) a critical mass of government employees who can mostly drown-out that noise, but it's there nonetheless and only gets louder as more power is afforded to these institutions.
That's what I was saying, if the gov overestimate inflation, you pay less taxes. If the gov underestimate taxes you pay more taxes. Dread wrote it the opposite way around, or maybe I just read it wrong.
"Wer Visionen hat, sollte zum Arzt gehen." - Helmut Schmidt
Again the legislature sets the expenditure and income, not the bureaucracy. The calculation of GDP is purely technocratic and only used if the legislature permits it to be used (which it does, on the expenditure side).
Having one side only linked to GDP provides an incentive to fudge the figures (a bad idea). Having both sides of the balance sheet using the same adjustment reverses that bad idea, it doesn't exacerbate it.
Doesn't all this math depend on the Thing behind the Tax? Seems to me it matters if it's a product or service, and the purpose of the Tax itself.
Proposing chained CPI for SS or Medicare is a way to reduce benefits, without the politically painful task of telling people they'll see less from current payroll tax deductions, or raising the percent of tax/contribution, or controlling costs of healthcare for an ageing population.
That's vastly different than a consumption Gas Tax to fund road building and maintenance, a Carbon Tax to reduce environmental impact....or any state or federal Income Tax that treats labor differently than financial assets.
Really, need a more complicated formula for taxes?
Taxes should be simple, that way no one can run, no can hide and everyone can understand them.
Brevior saltare cum deformibus viris est vita
If the (preferably independent) bureaucracy only adjusts thresholds etc. based on inflation (which seems sensible and fair to me), their power is pretty limited since the legislature can always adjust thresholds and tax rates by changing the tax code.
Keep on keepin' the beat alive!
Everyone wants simple answers to complex revenue and spending problems. Well, probably not the lawyers, accountants, advisors, legislative aides....or the military industrial complex, Big Banks, Big Ag, Big Pharma, Big Insurance, and their lobbyists.
You only need to take inflation into account if you have a tax which is progressive. VAT is not progressive.
The formula of the tax doesn't get more complicated, you just adjust the progression every year, that's it.
"Wer Visionen hat, sollte zum Arzt gehen." - Helmut Schmidt
Veldan has advocated for a Flat Tax....which isn't considered a 'progressive' tax.
Edit: It might be a semantic debate now, about what is inflated or inflationary. By that I mean our growing income inequality between labor and financial assets, and what's considered "earned income".
I have?
Nope. A consumption tax, the 'Fair Tax'.
Brevior saltare cum deformibus viris est vita
These calculations attempt to be as technocratic as possible, but that becomes harder and harder as the stakes go up. Also, not sure why you're assuming that the benefits inflator would be the same as the tax index inflator. These would likely be separate bureaucracies pursuing their own separate interests.
I think it's very difficult to do that. Legislatures in theory can do that, but in reality how willing and able are they to get a majority to overrule the bureaucracy on these kinds of issues? The reality is that the bureaucracy would likely nudge the figures over time, slowly pushing the boundaries upwards until they have larger and larger bases to work from.
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