ciph working paper

An Introduction to the CIPH-rate tax:

with some preliminary justifications

Douglas Bamford

Abstract: This paper is an introduction to my CIPH-rate tax system. The bulk of the

paper consists of an explanation of the unique form of tax calculation. This

calculation provides personalised tax rates and fully determines the value of property

each individual should receive. Furthermore, the paper introduces some preliminary

justifications for the superiority of the CIPH-rate tax over rival approaches to income

fairness.1

Introduction

In this paper I will present the CIPH-rate tax, which stands for Comprehensive

Income per hour rate, and then introduce some normative and philosophical

justifications for it. I will begin by explaining what I mean by comprehensive income,

and then explain the unique method of tax calculation. This calculation method is the

fundamental element of the CIPH-rate tax and I will explain this in detail before

explaining in greater detail the important role of—and basis for—hour-credits.

The primary aim of the paper is to introduce the tax system as a policy

proposal. However, after doing so I will introduce some normative considerations

relating to the CIPH-rate tax system. Firstly, I will consider the libertarian ‗free

acquisitionist‘ objection and then relate it to egalitarian entitlement theories. Finally, I

will make some elementary comparisons between the CIPH-rate tax and other types

of tax and income systems. I am not going to present the CIPH-rate tax in terms of

ideal justice, but instead raise some considerations. My contention is that an economic

system based upon the CIPH-rate tax is preferable to the alternative ones. More

specifically, it represents a much fairer entitlement theory of justice. Other entitlement

theories of justice, particularly libertarianism, are unfair, while many egalitarian

proposals do not pay sufficient attention to issues of property entitlement and

economic efficiency. Unfortunately, due to the wide ranging nature of this paper, I

cannot go into as much detail on either the philosophy or the practicalities of the tax

system as would be ideal. Such details would require at least a book, and this paper

can only provide an introduction to the justification of the CIPH-rate tax.

1 I would like to thank those who attended the CRIPS workshop on this paper, in particular Andrew

Walton, Chris Clarke and Katy Long. I would also like to thank Ed Page and Kazunari Morii, who

responded to an early draft.

Introduction to the CIPH-rate tax

Douglas Bamford

2

What counts as comprehensive income?

The CIPH-rate tax is a tax on comprehensive income, and I think it useful to

begin by explaining what this means. The notion of comprehensive income is

contested,2 but I need not offer a universal definition. For the purposes of my

proposal, the definition need only be consistent and practicable.3 As such, I will

briefly explain how to picture comprehensive income with the aid of an imaginary

person, Simone. We can imagine all the items of property that Simone owns as part of

an invisible bubble. When a new item enters that bubble it counts as net

comprehensive income at its money value at that point in time. The focus of the

CIPH-rate tax is to ensure that the value of Simone‘s incoming (net) property is

appropriately fair.4 This means that the gross income she receives should be taxed to

ensure fair net income. As such, we can imagine a second, outer, bubble into which

all gross income is received. The property in this outer bubble is split into net income

and taxation, where the net income moves into her personal sphere and the tax

revenues go to the tax authority.

Once we recognise that it is possible to exchange any item of property for

money before or after the transfer, we can see that the money value is the relevant

point of comparison. With this realisation, we can broaden our understanding of

‗property‘ to be anything of money value, including services. After all, the person

who pays for Simone‘s butler or accountant could have instead bought her land, or

just given her the money.

Clearly, some forms of income will not be financial in nature, and hence easily

split into tax and net income. An obvious example would be a piece of land and

building. When someone receives non-financial income they will only be able to take

full legal ownership of the item if they pay the required tax on it. Alternatively, the

recipient will have to sell the item with the proceeds split into tax and net income. As

indicated above, the receipt of services (with a positive money value) also count as

income received, and hence require a tax payment.

Not all incoming property comes in the simple form described above; people

can also gain from property they own. When Simone profits from transactions

involving the property in her bubble—either as an investment return or as capital gain

when she sells an item of property for profit—that profit should also count as taxable

2 See Henry Simon, in Parker et. al. (eds), 1986; Pechman (ed), 1977.

3 The CIPH-rate tax does not suffer from many of the problems that Bittker, for example, raises about

using a comprehensive tax base (Bittker, 1967). Some of Bittker‘s comments do raise important

questions for a comprehensive income tax; attempting to tax anything comprehensively (whether

income, consumption, or wealth) is always going to be difficult. However, the alternative is to have a

mixed tax base with all the complications, loopholes, and injustices that approach entails. 4 You might say that the CIPH-rate tax in fact defines what fairness is, though I am not presenting it as

an ideal theory of justice.


Douglas Bamford

3

(gross) income such that she only receives a fair (net) quantity.5 There is not room

here to go into further details on this point, but suffice to note that all realised gains

are treated as taxable income according to the CIPH-rate tax.

It is worth mentioning that Simone should of course be able to swap her

property for other forms of property, so for example, when she buys food in a shop

she exchanges one form of property (money) for another (food). This would not

represent income as long as there was no profit on the money, which we can fairly

assume since we judge profit in money terms. Another practical point worthy of

mention is that it would be necessary to ignore and exempt low-value non-financial

gifts, up to an annual limit. This would allow people to give and receive tokens of

affection without requiring them to use their time accounting for them, and reduces

the bureaucratic burden on the gifters and the tax-payer.

We can take gross lifetime income as given because it simply results from

economic transactions by free individuals. However, a lifetime comprehensive income

tax is necessary to ensure that individuals obtain an appropriate, or fair, net

comprehensive income. The role of the tax is not just to create revenue for

government, but also to ensure that all receive a fair income.

A noteworthy feature of comprehensive lifetime income taxes is that they are

not only tax systems. Looked at from a different vantage, they are comprehensive

income systems. As it fully determines the value of the property each person should

receive, it is also possible to view it as a system of property entitlement. We can even

describe the resulting economic system as of a distinct kind. For the purposes of this

paper I will mostly refer to it as a tax system, though I will also compare it from the

other perspectives towards the end of the paper.

The CIPH-rate tax calculation

On a basic level, the CIPH-rate tax is an income tax system that would operate

in an advanced market based economy of the sort with which the developed world is

familiar. A good place to begin to describe the workings of the CIPH-rate tax is by

explaining the acronym. I have discussed the CI element, which stands for

Comprehensive Income. As should be clear, all and any income is liable to taxation

under the CIPH-rate tax, not just earnings. As such, inheritance and gifts count as

income and any separate taxes on them would be abolished. The CIPH-rate tax system

should also replace all corporation, share, value added and sales taxes. As such, it is

intended to replace the many taxes we have at the moment with one. However, I

5 While this is a simple enough definition of comprehensive income, it may be difficult for the tax

authority to track all incoming items. There is, as such, an increased potential for concealed income

fraud. Unfortunately, there is no room here to detail the methods to combat such fraud and I will need

to do this elsewhere.


Douglas Bamford

4

should say that one type of tax should remain; Pigovian taxes. These are taxes on

antisocial or damaging behaviour such as causing pollution or smoking. Pigovian

taxes aside, comprehensive income is the sole tax base under a CIPH-rate tax.

The second half of the acronym indicates the fundamental difference between

the current system and the CIPH-rate tax—Per Hour-rate. This refers to the unique

method of calculation. It is worth noting, also, that it works very differently from any

other tax system, real or imagined, because of the interplay of units within the

calculation, as I will now describe.

Years, hours and lifetimes

Income tax, as we know it, is an annual tax that applies to every year

separately. So each year is distinct from the last, and the tax calculation is based

entirely on the income received in that year. This means that the tax system cannot

take account of lifetime income. The CIPH-rate tax, by contrast, is an ongoing—

lifetime—tax.

The CIPH-rate tax does not have a horizon of one year, after which the tax

calculation begins again.6 Instead, it begins for someone when they reach adulthood

and ends when they die.7 Fortunately, the tax authority would not have to wait for

someone to expire before receiving his or her tax payment; the system calculates and

receives payments continuously. Although it extends the horizon of the tax from a

year to a lifetime, the basis of the calculation is reduced from a year to an average

lifetime hour at work. The introduction of hour-credits makes such calculations

possible, as will become clear. I will explain hour-credits in more detail later, for now

it is enough to highlight that people receive them for time spent at work. So instead of

basing everything on the calendar year, the CIPH-rate tax allows for lifetime tax and

income figures by utilising an hourly average. I have said that the CIPH-rate tax is a

lifetime tax on total gross income, utilising hourly averages, which gives an indication

of its scope. However, this does not explain how to calculate tax rates.

At present, people pay a percentage of their annual income as income tax.

Usually, a person‘s tax rate varies depending on the income they receive in that year,

though the range of rates is small. There is an annual tax horizon and an annual basis

for the calculation. I have said that the CIPH-rate tax has a horizon of a lifetime, and

an average hour as the basis. As such, tax is calculated as a percentage of average

hourly income, not the total income received in a given period. In order to express

how this is possible I will distinguish three terms, gross income, which is simple pre-

6 Of course, annual tax structures receive payments throughout the year, pro-rata. If these ‗proportions‘

prove to have been inaccurate, a person will receive a rebate or a bill at the end of the year. 7 This is one of the ways by which the CIPH-rate tax taxes individuals more explicitly. If an individual

pays tax on each year of their life separately it does not consider their economic lives as a whole, see

for example Parfit, (1986: part 3), McKerlie (1989), Temkin, (1993: chapter 8).


Douglas Bamford

5

tax receipts, net income, which is the personal income received after tax and tax,

which is the amount that goes to the gathering authority. (This authority is often

called Revenue,8 but I will call it the tax authority.) Adding net income to tax will

always equal gross income, just as subtracting tax from gross income equals net

income. This tautology makes the CIPH-rate tax a very simple tax to calculate. The

tautology also means that I will sometimes refer to net income received and

sometimes refer to tax paid depending on the context—as the two are related this is

acceptable. Only three pieces of information are necessary in order to calculate

someone‘s total tax liability, their total gross income, the current tax rates, and their

total hour credits. Hour credits make the CIPH-rate tax calculations possible, and I

will discuss them in more detail later. Prior to that, I will fully explain the CIPH-rate

tax calculation.

Gross, net and tax calculations

Under a CIPH-rate tax system, an individual‘s tax-rate is set as a percentage

of their average gross hourly income. The simplest way to explain this is to describe

the straightforward calculation that would take place when calculating their tax

liability. The first step in the calculation is to divide a person‘s gross lifetime income

by the total number of hours they have worked (their hour credits), resulting in a

mean gross income per hour.9 For every mean gross income per hour there

corresponds a specific tax rate, expressing the split between tax and net income. I will

discuss tax rates in more detail in the following section. For the purpose of

understanding the calculation, it is necessary to remember that tax rates are not based

solely on gross income; so rather than basing tax rates solely on gross annual income,

the CIPH-rate tax uses lifetime gross income and the number of hours worked.

The second step is to apply the tax rate; after calculating the mean gross

income per hour, it is possible to calculate the split between tax and net income for

this ‗mean hour‘. For every mean hourly gross income there corresponds a mean

hourly net income, and mean hourly tax. For example, an individual with a gross

average of €26 may pay €13 tax and receive €13 net income for each hour. The third

step is to multiply both of these by the number of hour-credits, which indicates the

amount of money an individual should have received and paid in tax during their adult

life. However, they have already paid tax and received income during the course of

their life. The person‘s gross income has increased, which means that their tax and net

income has also increased. So the final step is to calculate the difference between the

8 For example, the Inland Revenue—recently renamed Revenue Customs—in the UK, and the Internal

Revenue Service in the USA. 9 These two pieces of information—gross lifetime income and the number of hours they have

worked—are the only information required about a person in order to calculate their tax and net

income.


Douglas Bamford

6

new amounts and the old. This indicates the money due to the individual and the tax

authority.10

It is straightforward to describe this process in action.11

To reiterate, it is easy to calculate the amount that is due to someone at the end

of each pay period (e.g. a month). Presumably, they will have increased both their

hour credits and their gross income. Dividing gross income by the number of hour-

credits will show a gross hourly income. This gross hourly income will correspond to

an amount of tax and net yield for that average hour. So the tax rate creates two

hourly figures from one, net income and tax, which total to gross income. Multiplying

average hourly tax and average hourly net income figures by hour credits will indicate

the amount of tax the individual should have paid, and the amount of income they

should have received over their lifetime. In order to calculate net income for the

period in question, subtract the amount of income received previously from the total

amount that they now should have received, and similarly with tax.12

I will give an

example.

Let us consider someone with a fifty percent tax rate, who previously had

9,825 hour credits and a gross income of €255,450. In the past month she has worked

175 hours and received €4,550. So she has now worked 10,000 hours, earning

€260,000. As she has a 50% tax rate, she should have paid €130,000 in tax and

received €130,000 in net income. In this simple example,13

she has previously

received €127,725 and paid that amount in tax. Her additional 175 hours and €4,550

therefore nets her €2,275 this month, which is also her tax bill.

Tax rates vary according to average hourly gross income, as I will explain in

the following section. For now, it is useful to consider how an individual will view

her net income under the CIPH-rate tax system. She will receive net income when she

obtains hour credits, when she receives gross income, or when she obtains both

together.14

When it comes to income, people need to know how much they will get in

the future, but will they know how much they will get? Everyone will have a good

idea of his or her tax rate (assuming that their new hour credits and income are small

relative to their pre-existing quantity). So if an individual receives an hour credit, they

will have an idea how much they will get as a result; an hour credit, for them, is worth

x amount of money. If an individual receives a windfall, they will have an idea of

their tax rate, say 25%, and will know they will receive 75% of their windfall up

front. So people can always estimate their future income by using hour credits, or

10

Remember that adding net income and tax will always equal the gross income. 11

I will not discuss here the order of payments—tax authority or individual first—as either is possible. 12

In fact if you do one of these calculations you will have the answer to the other. 13

It is unlikely that any individual would have a marginal tax rate equal to their average tax rate—the

odds on this would be astronomical. 14

This is confused slightly by non-financial income, which cannot be split into a tax and net payment

and therefore must be settled separately.


Douglas Bamford

7

their likely tax rate.15

The individual‘s tax rate indicates both the money they can

expect to get from an hour credit, and the percentage of any windfall they can expect

to receive. I will now explain the fair tax rates.

Tax rates

I do not here wish to stipulate where stipulation is unwanted and unnecessary.

In a sense, setting the tax rate under the CIPH-rate tax is up to those involved in the

task of creating the system. However, certain features of the tax rate are fundamental

to the CIPH-rate tax even if the details are not. As I have made clear, the tax rate is

based upon an individual‘s average hourly rate, and every gross hourly income will

have a corresponding tax rate (and hence net hourly income). We could plot a graph

with gross income and tax, and this graph is also expressible as an equation—just as

any graph can be. Even the tax bands with which we are familiar actually create such

a linear graph, albeit for a year rather than an average hour. It is also important to note

that it is perfectly possible for hourly tax rates to run to several decimal places, even

though the currency does not run so small. This accuracy is possible and advisable

because of the multiplicative nature of the calculation; gross amounts are divided and

multiplied by hour credits. As individuals get older they will amass a large number of

hour-credits, and so greater accuracy will make a real difference. I will now describe

the features of the tax-rate graph for the CIPH-rate tax. These aspects make the CIPH-

rate tax fair and efficient.

Firstly, there would be a negative income tax to ensure that everybody who

works receives a reasonable income for his or her time. Secondly, tax rates would rise

reasonably steeply to rates in the 80th

and 90th

percentiles. The rates would then level

out somewhat and cease to rise above 99%—or perhaps even 99.99%—at extremely

large average hourly incomes. Somewhere between these extremes, nearer to the low

incomes, there will be a gross income that will be equal to net income—i.e. a tax rate

of zero. But without mentioning figures, what does this mean? The figures do not

matter because they are relative, so I will explain the tax rates in relative terms. I

would say that the tax rate should be ninety-something percent by the time net income

has increased to three or four times the minimum hourly net income. This means that

someone with a gross hourly of income of about forty times the minimum hourly

income will receive about four times as much net income for each hour worked as the

lowest paid person.

Thirdly, the tax rate must never drop with an increase in gross hourly

income—the percentage must either rise or stay the same as income increases.

Fourthly, any increase in gross income should always yield an increase in net income,

15

The tax authority can offer services to give individuals more precise information about hypothetical

future income.


Douglas Bamford

8

even if the rise in net income is a small fraction of the gross. Another way of putting

this is that the marginal tax rate would never rise to 100%. As the average and

marginal tax rates16

never rise to 100% it is always economically rational for an

individual to accept a gift, or a pay rise for the same work. If they were already

paying a high rate of tax, their tax rate might be 99%, but no one would refuse 1% of

anything if it were free. Therefore, while an increase in gross mean income will

always result in a higher rate of tax, the CIPH-rate tax does not create a reason to

reject extra income.17

I will invent some figures to indicate how this might work. Let us assume that

a society decides that no one should receive less than $10 per hour credit. So for a

gross hourly income of $0.01, the net income is $10. Net and gross incomes equal one

another at about $12 an hour—the point with a zero tax rate. Someone with a gross

hourly average income of $36 an hour will receive $18 net, at a tax rate of fifty

percent. Someone with a gross income of $300 an hour would have a net income of

$30 an hour—a tax rate of ninety percent. The tax rate should therefore have a similar

shape to a logarithmic function when plotting gross income against tax rate, as

follows:

16

As the marginal tax cannot reach 100% under the CIPH-rate tax, the average can never reach it

either. 17

The issues of efficiency and incentives require much more detailed discussion, for which there is not

sufficient room in this paper.


Douglas Bamford

9

The line, of course, continues beyond the limits depicted in the graph. It is

worth emphasising that this is the tax rate for each individual hour credit, not for total

gross income. I have not included money values because they are relative anyway. At

this point I need merely state that the graph should take this shape and that those with

net earnings about four times the minimum hourly income should have a tax rate

above ninety percent on their gross income. Only graphs with this sort of shape will

live up to the intentions or purpose of the CIPH-rate tax. Mathematically, the graph

could have different equations within different ranges. Furthermore, it could take a

more angular form, which is unproblematic as long as it meets the above criteria.

Indeed, once the maximum tax rate is reached, let us say 99.9% at seven thousand

times the minimum income, the graph becomes a straight line with a gradient of zero.

This point must be reached, as an increase in gross income cannot lead to a fall in tax

rate (so it cannot go down), and obviously it would not be a maximum tax rate if it

went higher (so it cannot rise). With these tax rates, plotting gross income against net

receipts creates a graph like this:

The graph is steeper in the lower-middle region because this is where changes

in gross income will have the most effect. Changes in gross hourly income will have

less effect at very high and very low gross incomes. At these more extreme levels of

gross hourly income, the negative or positive taxes have a larger effect on net income.

At the lower range, the negative tax rate changes rapidly in response to changes in

gross income, so an increase in gross income is offset by a decrease in income from

negative tax. So at lower incomes, the tax rate has a large effect on income, but

changes very rapidly. At the other extreme, the tax rate changes little. So the high tax

rate dampens the effect of increased gross income on net income. The precise nature

of this graph, and its kink, depends upon the precise details of the tax rate graph. The

tax graph itself may also have kinks, as long as they do not violate the four conditions

set out above: that there are negative income taxes for low earners; that those with


Douglas Bamford

10

huge incomes face high tax rates; that tax-rates always rise when gross income does;

and that tax rates never reach one hundred percent.

Inflation18

One of the major differences between the CIPH-rate tax system and the

current income tax is that the horizon of the tax is extended from a year to a lifetime.

Of course, the relative price of all goods changes over time, but the price of money

between different periods of time can change as well. As a result, inflation is an

additional issue for the CIPH-rate tax; unlike annual tax systems, the CIPH-rate tax

has to deal with changes in the relative value of money over time.19

On the

assumption that inflation generally takes place over time, this may appear to make the

CIPH-rate tax unfair. If the tax rates were set upon inauguration of the system, the

prices to which they refer will be worth much less thirty or a hundred years later. For

example, a high wage in 1910 would be a very low wage in 2010. This problem is

easy to solve, simply by indexing the tax rate to inflation. This means that the tax

graph will retain its shape but shift along the gross income axis in line with inflation

or deflation every year.20

However, this solution to one problem creates another. While indexing the tax

rate means that the tax rates represent up to date income, the calculation will contain

figures from many years earlier. There will be a disparity between the amounts that

older workers have earned and that for which they are liable to tax. Again assuming

inflation over time, past earnings will presently appear very small in comparison to

their value at the time of receipt. So every year people would effectively have the tax

liability of their past earnings written off at the level of inflation. This is clearly

untenable, but is also easily solved by periodically indexing each individual‘s

attributed past earnings to current prices. This is a very straightforward process with a

modern computerized system. This indexing is perfectly fair because the tax rate will

have been altered as well. In conclusion, both the tax rates and the historical

payments of all taxpayers should be indexed to inflation.

The downside of this indexing is that it is more difficult for individuals to

make simple calculations about their future income and tax liability. The

inconvenience is minor as individuals will be able to make accurate estimates—

inflation would hopefully be a very small percentage. Furthermore, they will be

making assumptions about all the other variables anyway, since no one knows exactly

what will happen in the future. As calculations about future earnings are never

18

This is a technical section and some readers may be happy to skip over it. 19

Taxation and inflation have been discussed at length, for example, see Chapter 6 of the Meade

Report (IFS, 1978: 99-123) 20

It could conceivably be done more often than this.


Douglas Bamford

11

entirely exact, they can only ever serve as a guide anyway. This minor inconvenience

is a triviality when compared against the aim of having a fair tax system.

The readjustment of past income is another area in which the CIPH-rate tax

differs from other tax systems. Are there any potential problems with this? The

potential problem with doing so is that it overestimates inflation, not in terms of its

percentage, but simply by taking it as a discrete figure. The rate of inflation is

calculated for a set period—a quarter, or a year. However, the rate is a representation

of the multitude of changes that went on during that time frame. As a result, we can

consider an example of the extreme threshold case. Just before an inflation

revaluation, an individual is given the choice to receive a windfall immediately, or

just after the revaluation; they would probably choose to receive it afterwards.

This individual would take their windfall after the revaluation because they

receive the same gross amount either way, but if they receive the amount before the

revaluation, they will pay more tax on it. This occurs because past tax account

amounts—gross and net income and tax paid—shift after the revaluation, but the

windfall is the same either way. If the windfall arrives pre-revaluation, it too will be

revalued alongside the new tax rates. As an example, take an individual with a sixty

percent tax rate who is due a windfall of £1,000, and an inflation rate of one percent.

If the individual receives it before the revaluation they receive £400, but that amount

is soon revised up to £404 net income on their tax account. However, they did not

receive £404. After revaluation, their windfall is attributed as £1,010, split £404 to

£606. This simple example shows us the nature of the problem—the revaluation is a

sudden jolt to correct for a gradual change. Either side of the sudden jolt, there will

be two extremes for tax accounts, but there are no such extremes in the real world.21

For the most part, this problem would have very little effect on people—most

people receive a regular income and would not want to delay it because of a

revaluation. We can hope that inflation will be low, in which case the ‗jolts‘ will be

very minor. If the jolts became a serious problem, it is possible to lessen their impact

by increasing the frequency of revaluations. With quarterly revaluations, for example,

there will be a much smaller difference between the start and the end of each period.

Some may complain that taxpayers would need to understand this inflation

revaluation process and why it should happen so regularly; it may frustrate those who

are baffled by economics and mathematics. However, inflation occurs whether or not

people understand compound growth rates, and the tax system needs to be fair

whether or not everyone understands it.

There is another, more radical, way around this jolting problem. I have been

assuming that the revaluation would apply to one particular point in time, at which all

values would change at the same rate. However, it would be possible to smooth out

21

This effect occurs in many different places, thresholds can induce changes in behaviour. Examples

are the artificial seasons in sports, or annual tax thresholds under the current tax system.


Douglas Bamford

12

the inflation of a period by assuming that it occurred equally throughout the period.

An inflation rate of one percent a year, could be assumed to have taken place at 1/365

percent a day for the duration of that period. The tax authority computer has the date

of all the transfers a person has received, and their values. As such, upon revaluation,

a transfer from the first day of the period would be revalued up by one percent, while

one from the last day would only be revalued up by 1/36500. In this way, historical

transfers are first aligned to the next revaluation, and from there can be revalued up

annually along with all other historical transfers in the discrete fashion described

above.

I have argued that the CIPH-rate tax requires the regular revaluation of past

transfers in light of inflation. When installing the CIPH-rate tax it would be necessary

to decide how this should proceed. However, it is possible to make changes later on—

to change the frequency of revaluations, or to introduce a ‗smoothing‘ system, at a

later date. There is no need for me to make prescriptions here; I have merely listed

some considerations and some options. The main conclusion is that inflation does not

undermine lifetime tax systems such as the CIPH-rate tax.

What are hour-credits?

Hour credits make the CIPH-rate tax calculations possible; they are an

essential component in the system. Put simply, hour credits make all the advantageous

aspects of the CIPH-rate tax possible. In this section I will draw out some of the

implications of hour-credits in order to explain some of the features and benefits of

the system.

One interesting point is that under the CIPH-rate tax hour credits are necessary

for income. If someone receives income from inheritance and gifts without ever

obtaining any hour credits on their tax account they will not receive any income; their

effective tax rate will be 100%.22

This occurs because, when their gross income is

divided by zero hours, tax calculated, and re-multiplied by zero, the result will of

course be no net income.23

Hour credits therefore embody the notion that what

someone receives from society should correspond in some way to the time that person

contributes to social activity.24

Overall, the amount of ‗unearned‘ income—gross

income received without spending any time performing an activity—that a person

receives will depend upon the amount of hour-credits that they receive.

A second unique feature of the CIPH-rate tax arises from the use of a lifetime

hourly average. As a result of this, the tax that someone pays at the time they receive

22

Of course, it is almost unheard of for someone to make no contribution whatsoever. 23

Dividing by zero is unintelligible. However, this does not matter in this instance as any number,

intelligible or not, multiplied by zero will result in zero. 24

There is not room here to discuss this in relation to ideal justice. However, I will compare rival

economic systems in later sections.


Douglas Bamford

13

their income is never the end of the story—the average can change over time,

potentially releasing some past gross income. Let us take the example of a sixteen

year old who receives a large bequest, say a million dollars. As the youth has no hour

credits, the entire amount would go to the tax authority. However, the amount is on

his account with the authority, and it will affect his receipts for the remainder of his

life. As our youth gets older, he will obtain more and more hour credits. As he does

so, his windfall will have a smaller effect on his gross hourly income, and his tax rate

will fall accordingly. Over time, the money he initially paid in as tax is effectively

released to him.

Compare with another recipient of a million dollars. This individual, however,

receives it at sixty years and has already built up a lot of hour-credits on her tax

account. At age sixty, all else being the same, the person who received his bequest at

age sixteen will have received the same amount of his bequest as the sixty year old.

Let us say that the tax rate for both at sixty years is sixty percent per hour, in which

case they will have received four hundred thousand dollars of their bequest. Of

course, the first recipient will have received it over the course his working life, while

the sixty-year-old recipient will receive the net amount at once. If they both continue

to obtain hour credits, they will continue to receive more with each additional credit

than they would have had if they never received the bequest.

The above example shows the role that hour credits play in the tax calculation,

but it does not explain exactly what they are. A brief description will hopefully ensure

there is no confusion. Hour credits are important because of their strong influence on

a person‘s net income. Physically, however, they do not take any substantial form;

employers would not give workers hour credits to take home after work. They are

rather a method of counting, undertaken by the tax authority. They exist primarily on

the tax authority computer, though hopefully this information would be backed up

onto paper every so often ―just in case.‖ Institutions that confer the credits would also

keep a record of the credits they have conferred.

Hour credits are important because of their effect on income; an individual

will always receive money when they obtain an hour credit on their tax account. The

minimum amount an hour credit can be worth is the negative tax amount someone

would receive if they had no gross income alongside their hour credits. This acts as an

effective minimum wage, though the money comes not from an employer but from

the rest of society via the tax authority. Furthermore, the amount of hour-credits a

person has will strongly influence their tax rate when receiving unearned income, as

described in the above examples of the fortunate beneficiaries.

I would really like to drive home the point that hour credits do not have an

eternal monetary value for their recipient, they continue to have value through their

influence on future tax rates. In this section I have hopefully made this point with the

use of examples. When an individual receives an hour credit, they will receive their

net hourly pay at that point in time. The hour credit will continue to influence all their

future receipts, and is therefore potentially worth more than the net income it confers


Douglas Bamford

14

at the time. The CIPH-rate tax deals with time in a different way to other tax systems,

as past contributions continue to interact throughout the lifetime of the individual.

Other tax systems attempt to tax all income streams separately and over limited time

frames, with distorted and unfavourable results.

Due to the nature of the CIPH-rate tax system calculations, the (effective)

value of past credits can increase or decrease in value after they have been received.

This feature makes the system fairer than others. However, the idea that someone

could receive net income from his or her hour credit, but that the credit will be worth

less than this in the future, implies a deficit to pay off. There is no need to worry here.

While hour credits may drop in value for some people over time, no one would ever

have to return money to the tax authority as a result. The consequence of a drop in

average income would never be this extreme. Any decrease in the overall hour-credit

value will always result from an increase in hour-credits, and hour credits always

bring in net income. The net income from receiving more hour credits will always

outweigh the drop in net income on the pre-existing hour credits. I will develop the

example of the fortunate young man from earlier in this section in order to illustrate

how this works.

Let us say our young man obtains one hundred hour credits for his first month

at work. He therefore has an average hourly gross income of ten thousand dollars

(around $1,000,000/100), giving a net hourly income, let us say, of eighty dollars. So,

after one month of work, our fortunate individual receives eight thousand dollars

(~$80 x 100). Of course, his average net income will continue to drop along with his

average gross income. After a second month, his gross hourly income will be around

five thousand dollars (around £1,000,000/200), meaning a net income of seventy

dollars. His net hourly income has dropped—both for amounts he has received

previously, and the amount he is awaiting—but he does not need to return any money

to the tax authority. According to the method of calculation, he now should have

received fourteen thousand dollars all told (~$70 x 200). He has received eight

thousand already, and so this month, he receives six thousand dollars.

In the second month, his net income per hour may have dropped by ten

dollars, but he has received this amount (~$70) one hundred times while at the same

time as losing ten dollars from the previous hundred hour credits. We can also see in

this simple exposition why he receives six thousand dollars in the second month—his

new hour credits are worth seven thousand but the lost value on his old ones reduce

this amount by one thousand.25

The properties of the tax are such that whenever

someone receives gross income or hour credits they will always receive some money.

In conclusion, individuals would never need to return money to the tax authority.

25

It is worth noting that the large drop in average in this example would be very atypical; it only arose

because the individual has a huge income and very few hour credits. Each month the drop will be

smaller than the last as each new batch of hour-credits has a lesser relative effect on the calculation.


Douglas Bamford

15

In this section I have emphasised how important hour credits are to the CIPH-

rate tax system. Hour credits have a lasting value to their holders because, along with

conferring immediate income, they remain on account for the lifetime of the

individual. The CIPH-rate tax is a single, but very dynamic, lifetime tax and income

system. It therefore has fair results for each individual, which non-individualized tax

systems cannot match. As the calculation is so important, it is vital to understand how

people obtain hour credits and what counts as gross income. These elements are

fundamental to the calculation of total net income, which itself is fundamentally

personally and politically important. I have explained how the calculation works, but

it remains to clarify what entitles individuals to hour credits.

For what do people get hour credits?

I will now explain in more detail the sources of hour-credits. As is obvious

from my earlier discussion, the primary source of hour-credits would be from

employers as indication of time spent in paid work. Employers would inform the tax

authority of the number of hours their employees have worked in each pay period,

information employers should know. They would know this either because they pay

their workers per hour, or else the workers have a contract and are salaried. The

authorities would have to be alert to hour-credit fraud, ensuring that all businesses

licensed to give out hour-credits are legitimate. Such licenses would be given only to

those businesses which are functioning and which can survive financially. This

particularly applies to the self-employed, who might have scope and incentive to

commit both hour-credit and income frauds.

In the name of fairness, people should also receive hour credits for other

reasons. Examples are for unpaid workers like students26

and carers.27

Furthermore,

those who suffer disabilities should receive hour credits rather than compensatory

payments in proportion to the amount of time their disability is likely to cost them.

This means that disabled persons will not suffer from higher taxes if they decide to

work less than other people. These additional hour credits exist in order to ensure

fairness throughout society.

What about people who cannot get work, and therefore hour credits? Since

hour-credits are so important, having no access to them would be disastrous. I suggest

that society should provide guaranteed work programmes via local-government

organised projects. However, those who are not found work by such a programme

26

Representing the amount of time they are expected to study for their course, and depending upon the

completion of each of the several parts of a longer course. 27

By carers I mean those who care for children or disabled adults, where hour credits represent the

amount of time professionals would spend caring for that person.


Douglas Bamford

16

should receive some hour-credits, which would effectively replace the current

unemployment benefit payment.28

Finally, there would be a maximum amount of hour-credits for each individual

in a given period (e.g. Month). This would reduce the scope for hour-credit fraud, and

indicates the most people are expected to work (though people could of course work

longer without gaining any additional credits if they wish).

Further points and issues

There are four miscellaneous items that I feel I should mention regarding the

CIPH-rate tax. The first is that it would be possible for couples to combine their tax

accounts into one, and if necessary also to demerge them later. This is perfectly

possible, though there is no room here to explain the details. Secondly, administering

a CIPH-rate tax system would admittedly be more expensive than the current system.

There are two reasons for this, the increased bureaucracy of accounting for hour-

credits and the increased scope for fraud. As I have mentioned, the CIPH-rate tax is

vulnerable to two additional types of fraud, concealed income fraud (which exists

under any income tax system) and hour-credit fraud. Technological advances reduce

the costs of both of these, though there is no room here to explain how.

Third, there is a problem of talent and capital flight where the CIPH-rate tax is

introduced in one jurisdiction only. The CIPH-rate tax would be acutely vulnerable to

tax competition, and would therefore need to be introduced internationally, though not

necessarily globally. This is an additional barrier to achieving it. Finally, I would like

to mention the large role of the state in such a system, and highlight the increased

potential for state power and tyranny. This would of course result from bad

governance rather than the tax system itself, but checks and balances—and watchful

citizenship—would be necessary to ensure that the state did not abuse its

informational power.

Justifications for the CIPH-rate tax

In the remainder of this paper I will attempt some preliminary justifications of the

CIPH-rate tax. As I have indicated, there is not room here to present the CIPH-rate tax

in terms of ideal justice, except to argue against one such criticism from libertarians.

After dismissing the libertarian criticism I will provide comparisons between different

proposed economic systems and highlight the advantages of the CIPH-rate tax over its

rivals.

28

Currently called ‗jobseekers allowance‘ in UK, though colloquially known as ‗the dole.‘


Douglas Bamford

17

Libertarian property entitlement

Libertarian, or ‗free acquisitionist,‘ assumptions infect people‘s views on

property entitlement. The libertarian ideology is that once a piece of property is

owned by someone, that person alone should decide who should own it next, and this

should continue from owner to owner without interruption. This assumption was

utilised by John Locke in his writings on property in his Second Treatise on

Government,29

and developed more formally by Robert Nozick in Anarchy, State and

Utopia.30

I call this a ‗free acquisitionist‘ position because, while it is perfectly

acceptable for a property owner to decide what to do with their property, so called

libertarians also include the idea that the new owner should have the full right to

acquire it.

This leads us to the further question, in whose interest is the right to free

acquisition? The problem with the libertarian property system is that it works much

better for the talented and those from wealthy families, even though there is no reason

that the property system should be for the benefit of these people. This relates to the

liberal egalitarian hunt for a legitimate basic structure, or property system that is

justifiable to the worst off. This is notably found in Rawls‘ Theory of Justice31

and

also in Dworkin‘s Sovereign Virtue.32

Virtually no one actually supports a pure libertarian property system, so why

is it worth mentioning? I think it is worth mentioning because the property entitlement

system in almost all countries is a (variously modified) version of it, and people often

baulk at proposals that are not based on libertarian foundations. States have assorted

taxes which interrupt the libertarian process, but these taxes are generally designed to

raise revenue for government, not to ensure that people acquire a suitably fair amount

of property/to foster a fair property entitlement system.33

Now, I do not wish to

challenge the entitlement aspect of property entitlement rules, which is also present in

the egalitarian views of Dworkin and possibly even Rawls.34

Indeed, the CIPH-rate

tax is itself an egalitarian entitlement theory of justice (or property entitlement theory

if you prefer). However, it is worth noting that this free acquisitionist prejudice

undermines the acceptance of fully personalised income taxation, where an

individual‘s tax rate depends upon her relevant circumstances. With these

29

Locke, 1988. 30

Nozick, 1974. 31

Rawls, 1999, for a restatement of his views see Rawls, 2001. 32

Dworkin, 2000. 33

There are many exceptions to this rule, most notably various benefits for the worst off. However, I

think these are intended more as a safety net than a means to justice. So for those who think justice

requires a safety net they appear to be there for reasons of justice, but to me they do not. 34

Rawls, 2001: 50-2, 72-9, Dworkin, 2000: 83-92.


Douglas Bamford

18

considerations in mind, I will explain the relationship between income and this

understanding of fair property entitlement rules.

Property entitlement and net income

Free acquisitionists need not concern themselves with the difference between

the value of the property acquired by one person as opposed to another; it simply

belongs to its designated new owner. However, others—such as entitlement

egalitarians—need to compare the property that individuals receive in order to assess

whether it is fair. The obvious way to compare the various types of property that

individuals receive in a market economic system is to compare the money value of the

property that each individual obtains.

Indeed, I do not think there is any need to differentiate between the sources of

income; we should seek a comprehensive definition of income. As such, I think the

proper focus of comparison between persons should be focused on net comprehensive

lifetime income. This understanding of property entitlement, measured in money

terms, represents the amount of resources individuals obtain from society in order to

live their lives, and is the proper location of comparison between persons. Consider

two people with the same circumstances who receive the same income over their life,

who will therefore have equal ability to live their lives as they wish. However, where

two people with similar circumstances have very different lifetime incomes then one

will rightly envy the opportunities of the other. The society that allows the latter

would be unfair.35

The CIPH-rate tax represents an egalitarian entitlement theory,

which combines the desire for an egalitarian society which treats all as equals and one

which enables each person to decide for themselves how to live their lives as they

decide.

Comparisons with other systems

I will briefly compare a CIPH-rate tax system with the major rival systems.

The obvious place to start is with the current system. This, as I have said, is based

upon the free acquisitionist/libertarian approach to property: people are entitled to

whatever they are given minus any taxes due. However, these taxes are somewhat ad

hoc, and are not holistically designed to ensure fair or appropriate property receipts.

As a result, this system works very well for the rich and or talented (who can generate

income easily), but less well for everyone else. In its favour, it does incentivise people

to produce more of what people want, and to do unpleasant but useful jobs, in order to

earn more income.

35

The ‗envy-test‘ has been proposed by Varian (1974, 1975) and Dworkin (2000: chapter 2), with the

literature summarized by Arnsperger (1994).


Douglas Bamford

19

Another alternative is an equal-income (money-based) property entitlement

system, under which everyone receives identical money income. People could spend

this money as they desired, as long as they do not give it to others. While this would

be less skewed towards the rich and talented, it would discourage people from

working longer than others, since they would obtain no personal benefit from doing

so.36

Overall, the disincentives for all might even worsen the position of the least

well-off, resulting in a ‗levelling down‘ in contravention of Rawls‘ difference

principle.37

Furthermore, most people would agree that someone who chooses to

produce more than another, when both are equally able, should receive more as a

result. Therefore, on grounds of inefficiency and unfairness this alternative would be

worse than the current system.

The third alternative worthy of mention is one where income is linked solely

to hour-credits, where each hour-credit is of equal value. This system would

encourage people to work longer compared to the equal-income system, making it

more efficient. However, it would provide no incentive to work harder or more

productively, and leave no option to incentivise or reward people for undertaking

undesirable jobs. As such it would be both unfair and inefficient.

There are other alternative proposals which would merit further comparison.

For example the land value tax championed in the 1800s38

and recently revived by

Left-Libertarians such as Michael Otsuka.39

Other alternatives would include market

socialism40

and basic income provision, as defended by Phillipe Van Parijs.41

These

have a claim to being egalitarian, and have various forms of justification which there

is no room for here. Overall, however, I do not think these positions pay enough

attention to the circumstances of the individual in the way that a personalised

comprehensive income tax can.

Advantages of the CIPH-rate tax

The CIPH-rate tax harnesses the best of the first three alternatives above,

while avoiding their down sides. It is efficient because it provides incentives for

people to work for longer, like an hour-credit system. However, it retains incentives

for greater productivity and allows people to earn more money if they perform less

popular work. It therefore incentivises useful economic behaviour. Furthermore, as a

36

Except where people have ‗moral incentives‘ to work more effectively, as described by Joseph

Carens (1981) in his interesting book on the subject. 37

Rawls, 1999: 65-73. 38

Perhaps most famously by Henry George (2005). 39

Otsuka, 2003. 40

This notion could be understood in different ways, for example as co-operative firms which compete

against one another. See for example Miller (1989). 41

Van Parijs (1995).


Douglas Bamford

20

tax, it can be considered non-distortionary,42

and hence efficient. It is a capital-based

system, and so avoids the informational inadequacies of centralised economic

systems. As well as being efficient, it is fair. Unlike every rival tax system, it allows

strongly egalitarian tax rates without correspondingly reducing incentives. As an

egalitarian I find this convincing, and think it follows well from egalitarian thinking

such as equality of resources. Egalitarian proposals are often dismissed as

economically inefficient, but the CIPH-rate tax combines efficiency and equality in a

way that no rival can match. Unfortunately, there is no room to back up this in detail

here. I will hopefully provide these arguments in other works.

It is also worth mentioning that while I think the CIPH-rate tax goes a long

way to meeting egalitarian requirements; non-egalitarians may find the CIPH-rate tax

appealing as well. For example, utilitarians would find reason to prefer it. While I am

not myself a utilitarian, some—such as Richard Layard43

—still cling to this

doctrine.44

Utilitarians are often torn between equality and efficiency because they

want to enlarge the size of the economic cake (usually requiring inequality), but

diminishing marginal returns make equality good for utility.45

As it combines equality

and efficiency, utilitarians would prefer the CIPH-rate tax to the above alternatives.

Conclusion

I have introduced the CIPH-rate tax system and presented some preliminary

justifications for it. In order to do this, I explained the meaning of comprehensive

income, and then the unique method of tax calculation. Using examples, I explained

the fundamental, but multi-faceted, role of hour-credits within the system. I then

briefly highlighted some issues before offering a simple comparison between the

CIPH-rate tax and some rival systems. The CIPH-rate tax represents an egalitarian

entitlement system that combines efficiency and equality in a way that alternative

types of economic system cannot match. Unfortunately there has not been room to

give a full justification of the features of the tax system, and that is an IOU I hope to

repay in the future.

42

See Varian, 1996: 518, Kay and King, 1990: 104. 43

Layard (2005). 44

Earlier proponents include Jeremy Bentham (see Bentham, 2000) and John Stuart Mill (see J.S. Mill,

1993). 45

Though of course, the law of diminishing marginal utility might not apply universally, and some

people may be particularly good or bad at converting resources into utility. Utilitarians may therefore

wish to channel resources to those who convert the more efficiently, as pointed out to me by Ed Page.

Whether a utilitarian government could turn this into a practicable economic system is another

question.


Douglas Bamford

21

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Surveys, 8, 155-86.

Bentham, Jeremy (2000). Selected Writings on Utilitarianism, Ware, Herts.:

Wordsworth.

Bittker, Boris (1967). ―A "Comprehensive Tax Base" as a Goal of Income Tax

Reform‖ Harvard Law Review, 80, 5, pp. 925-985.

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University of Chicago Press.

Dworkin, Ronald (2000). Sovereign Virtue; Cambridge, Mass.: Harvard.

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--------------- (1993). Utilirarianism, On Liberty, Considerations on Representative

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Otsuka, Michael (2003). Libertarianism without inequality, Oxford: Clarendon.

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--------------- (2001). Justice as Fairness: A Restatement (edited by Erin Kelly),

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