If you tell a teenage girl that she may go anywhere she likes tonight except, say, the Blue Casablanca Club, you will immediately fascinate her. What, she will wonder, is so bad about the Blue Casablanca? What goes on there? Is it naughty but thrilling?
That is the effect the Treasury has had by blacking out the arguments for and against a radically different way of raising tax. The Treasury wrote a paper which was released under the Freedom of Information Act. But where there should have been a discussion about the merits of a 'Flat Tax', the text was missing. Nothing could have been better designed to intrigue us. What is the Treasury trying to stop us from considering? Is this, too, wild but exciting?
Apparently Gordon Brown himself did not do the censoring. But of course his officials know that a flat tax is the very opposite of his approach. A flat tax might even provide a solution to the problems he has created.
So what is it?
A flat tax is a single rate of income tax that applies to everybody. Typically the tax rate in countries where it has so far been tried has been between 16 and 26 per cent. A rate of 22 per cent has been suggested for Britain. A vital part of what could make it attractive is that it comes with a vastly bigger tax free allowance. In Britain, people start paying tax on any income over £4,895. With a flat tax, it has been proposed that the tax free allowance should leap to £10,000 or even £12,000. Another key aspect is that all sorts of tax allowances and deductions would be abolished. This would be a dramatically simpler system.
The idea has suddenly become fashionable, sweeping across Eastern Europe and beyond.
It started with Estonia which established a flat tax rate of 26 per cent. The little country is so pleased with the results that it is going to bring the rate down to 20 per cent. Lithuania, Latvia and Russia have joined the bandwageon, followed by Serbia, Ukraine and Slovakia. Poland intends to take it on.Greece might do too. Ireland is introducing a flat tax for companies. And - most significant of all - Angela Merkel, who is likely to become Germany's new leader in September, has employed a flat tax supporter as her economic advisor.
At first blush, the idea sounds like a charter for the rich. The top rate would fall from 40 per cent to, say, 22 per cent. But when you look at it more closely, you discover that the rich would not be the greatest beneficiaries. The poor would be.
They would be completely taken out of tax. Take a lone woman of 64 with income of only, say, £6,000. She is defined by the Government as being in 'poverty'. Yet at the same time, the government demands that she pays income tax. It is obscene. A flat tax would end this absurdity.
A research paper published by the Adam Smith Institute suggests that the benefit for the poorest ten per cent would amount to 9.2% of their income. All the biggest percentage gains would all be for those at the lower end of the income scale. They would pay no income tax at all or pay it on a much smaller part of their incomes.
This would also make it more worthwhile for low-earners to work. At present, those on Jobseekers Allowance or other out-of-work benefits have to compare carefully the money they get from the state with the cash they could earn after tax. But if there was no tax, the advantage of working would become clear as daylight. So more people would work which would mean a more productive economy, more income from tax and lower benefit pay-outs - a win-win-win situation.
The essence of what Gordon Brown has been doing over the past eight years has been to create all sorts of allowances and tax credits. One minute he is offering a concession to the elderly, then to low-income families with children and so on. But how much simpler it would be to offer low tax or no tax to all the less well-off. How much better that they should be able to avoid filling in one of Gordon Brown's forms. Many people - especially pensioners - cannot face the paperwork and feel humiliated asking for money. So they pay more tax than they should. The Government has imposed a system which it knows will penalise such people. A flat tax system would get rid of that.
Admittedly it would cost quite a lot of money. But the James Review identified savings of £35 billion that could be made by this wasteful government. And the economic growth and employment a flat tax would encourage would make the rest up before long.
Hong Kong has had a flat tax since 1947 and its economic success has been awesome. And a flat tax would, surprisingly, raise almost as much from the rich as the current rate. They would stop avoiding so much tax through deductions and evasion. More rich people would come to live in Britain, too.
Of course, a drawback for Gordon Brown would be be that he would not get to do all his economic micro-management. He would not be able to get favourable headlines by giving a hand-out to Paul while not mentioning that he was paying for it by robbing Peter.
No wonder Gordon Brown does not like the idea. But the rest of us should be seriously interested.
(This is the unedited version of an article which appears in the Daily Express today.)
Posted by James Bartholomew • Indexed in Tax and growth
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........Admittedly it would cost quite a lot of money.......
That of course depends on the allowances and the rate that is set. The beauty of the system is though that you can reduce the rate and increase the allowances as the cost of tax collection & welfare falls.
It is a system that is biased towards low taxes.
Posted by: EU Serf at September 5, 2005 11:43 AM
It's called 'buying the vote' which is why Brown likes complexity to keep his voters in jobs and on the pay-roll. This is Real Politick and has nothing to do with growth and justice. It's politicians pursuing job preservaton as they always have done.
Posted by: Peter Crombie at September 8, 2005 08:37 PM
It is definately a great idea- biased towards the poor for sure. However, it may not be the best idea for the govt. perhaps because this system may not raise its revenue as much as the current system, albeit the arguments posed in the article..
Posted by: Fazal at November 13, 2005 10:11 PM
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It will never happen.
Not because it's not a good idea. But because the legions of incompetents whose non-jobs come from managing the over complex tax system will block it.
Accountant friend of mine told me about a case where a client of his, who ran a Chippy, was pestered to death over his return, the cretin looking for anything. He was being asked questions like "How many chips do you get out of a potato ?" (honest), and this is, apparently, typical.
Anyone know what % of tax revenues are lost in tax collection ?
Posted by: Paul at September 5, 2005 08:30 AM