Why not... introduce a flat tax?

 
Hand reaching out from pile of paper

A look at eye-catching policy ideas that are often talked about but never seem to feature in UK general election campaigns.

What is a flat tax?

Scrapping all existing income tax and national insurance rates and replacing them with a single "flat tax" is a brutally simple idea. Right wingers in America and elsewhere have been arguing the case for it for decades.

Some countries, including in Eastern Europe, have adopted some version of a flat tax in an attempt to boost economic growth. In the UK, the Conservatives have flirted with the idea, talking about the need for "flatter" taxes, without ever committing to it.

The UK Independence Party seems likely to be the only party to include a flat tax in its general election manifesto, although party chiefs have yet to decide the rate at which they think it should be set.

Rory Meakin: The case for a flat tax

Britain's tax code is one of the longest in the world. Tolley's yellow and orange tax handbooks now extend to over 17,000 pages, three times longer than in 1997.

We have a basic rate, a higher rate and an additional rate of income tax, with a different set of rates for dividends and yet another for savings.

Rory Meakin
  • Rory Meakin, Head of Tax Policy, The Taxpayers' Alliance (TPA)
  • Former policy director for Boris Johnson and lead researcher for the 2020 Tax Commission, making the case for a Single Income Tax
  • The TPA campaigns against government waste and for lower taxes
  • It is a limited company funded by individual and corporate donations

And then there's National Insurance, with different thresholds and rates for each, and separate rates for share fishermen, overseas development workers, the self-employed and women married before some time in 1977.

There's no need for taxes to be so maddeningly complex.

That complexity isn't just maddening, either. It also makes the tax system both economically and socially destructive. Quite apart from the money it sucks out of the productive economy, it's economically damaging for two reasons.

First, it requires an army of clever accountants and tax lawyers to navigate the system for businesses and an opposing battalion of bureaucrats to monitor all those rules and rates.

Second, it means that the public just doesn't understand how the tax system operates, which, among other things, risks discouraging people with new commercial ideas from starting new businesses. That means opportunities are lost and fewer jobs are created.

And it's socially damaging because the confusion leads to suspicion that others are getting away with something, directly leading to distrust of the whole system.

We need to sweep away all that complexity and replace it with lower, simpler and more proportionate taxes which are easier to understand, with fewer loopholes and exemptions.

The Single Income Tax proposal from the 2020 Tax Commission project of the TaxPayers' Alliance and Institute of Directors provides a blueprint for doing just that.

Those on very low incomes should pay no tax at all. But above that level a simple and fair principle should be enforced: if you earn twice as much, you pay twice as much.

Richard Murphy: The case against a flat tax

The myth that flat taxes are simple and would raise tax revenue is just that: a myth.

It's also a myth that a great deal of the UK tax code could be eliminated. That is not true unless we wanted to scrap whole taxes and lose the money they raise.

Richard Murphy
  • Richard Murphy, head of Tax Research
  • Chartered accountant and economist
  • Described by The Guardian as an "anti-poverty campaigner and tax expert"
  • Tax Research is a Limited Liability Partnership
  • It is funded by the Joseph Rowntree Charitable Trust, the TUC and leading trade unions

It is that last point that provides the real clue to what flat taxes are all about. It is not chance that they are always promoted by people who also argue for small government and massive cuts in public spending. That is what they are intended to deliver, and I have to agree, they would.

But there's even a sting in the tail in that.

Currently the top 10% of all income tax payers in the UK pay about 59% of all income tax. They also pay tax at higher rates than anyone else. That is why they pay so more, but that's also because they earn more than most, of course.

Under a flat tax system they would enjoy substantial - maybe massive - tax cuts.

Those on low incomes would almost certainly pay more because around the world flat tax systems are associated with high National Insurance contributions - that hit the lowest paid hardest.

So flat taxes are really about cutting taxes for the best off, cutting services (like the NHS) massively and requiring payment for their use instead, and increasing tax, overall, for the least well off. That's the reality.

And as for simplification? That won't happen, first because business needs complex tax systems to let it do the complex trades it undertakes, and second, because most of the complexity is about defining just what is taxable. That's the hard bit. Multiplying by two percentage rates rather than one is, in comparison, no problem at all.

So flat tax would simplify almost nothing, but leave you paying to see the doctor or educate you children. That's what the flat taxers fail to mention.

 

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  • Comment number 132.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • rate this
    +4

    Comment number 131.

    UKIP embracing the idea is a clue to its merits.

  • rate this
    -20

    Comment number 130.

    34.wvpTV
    Currently we have an unfair unbalanced economic system where many millions of hard working people need benefits to afford to work while their employers build high profit empires.
    =
    You sound like Karl Marx.
    I agree the system is unfair, but most (un-newsworthy) business owners are actually struggling. We should all seek the same freedom of Google, so we can all succeed, as Google has!

  • rate this
    0

    Comment number 129.

    topher
    if you buy dog food that is for working dogs there is no vat on it but can still be fed to your family pet regardless of the breed.

  • rate this
    0

    Comment number 128.

    The problem with any tax system, and what caused the downfall of the Community Charge, is simple.
    Everybody wants good public services, but many people want someone else to pay for it!

  • rate this
    +1

    Comment number 127.

    Doesn't the current American push propose something different to a flat tax?

    http://www.fairtax.org

  • rate this
    +65

    Comment number 126.

    When I was on basic rate tax when I first started in work, I thought about the problem of paying higher tax rates as I earned more. I thought "that would be a problem I'd love to have" and indeed, that's as it has turned out. For most of my working life I've paid higher rate tax & at no time have I thought "better not work hard to get higher pay, as I'll pay more tax". 60% of a lot is still a lot.

  • rate this
    +3

    Comment number 125.

    @116 Currently the lowest tax bracket in the UK pays 20% income tax and 12% national insurance, a 32% tax on your earnings, the 30% tax is actually a reduction in this case.

  • rate this
    -8

    Comment number 124.

    Amazing that those who marked me down (number 97) think it's OK for someone on benefits to be taxed at over 62% (and 100% in some cases) for working. They either don't understand tax/benefits or don't understand why so many low earners are unwilling to work, or are socialists who thrive from having an underclass on which to prey and peddle their politics.

  • rate this
    -3

    Comment number 123.

    While I make so little that I pay no tax at all, I still feel that a flat tax is a far fairer system than the ludicrously inefficient system we currenty use.

    Millionares will always be millionares, and are very VERY good at hiding thier money. So they think "Why the hell should I keep my money in Britain and get only half of it when I can keep it in Monaco and keep 90% of it?"

  • rate this
    +30

    Comment number 122.

    From a previous Nick Robinson article:
    "You pay VAT on dog biscuits, but you don't pay VAT on rabbit food."
    I fully support progressive taxes, but there are doubtless thousands of querks and flaws in the current tax code that could be eliminated.

    Of course any change would negatively impact someone (like rabbit owners), but a simple understandable system would be a big gain.

  • rate this
    +3

    Comment number 121.

    @114.lizmcp

    "I pay more than £10k in tax and NI, because I've worked hard and got qualifications, and earn a salary appropriate to those efforts."

    If everyone got a salary appropriate for their efforts I would support flat tax. But they don't. Far from it in fact.

  • Comment number 120.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • rate this
    -6

    Comment number 119.

    92."I think we should have a flat rate tax of 80% with the first £40,000 tax-free" and 90 "No no and no to a flat tax. The rich must pay more." - "tax da rich" is the only answer the left has - ignore the effort and energy people invest, ignore th employment they create and just bully and belittle success. The BBC's relentlessly (and hypocritical, severace pay) biased support is shameful.

  • rate this
    +1

    Comment number 118.

    Flat direct taxation is a logical impossibility - one person will say that it implies CGT should be the same as income tax, another will say that to avoid double taxation it should be zero. They'll never agree.

    Flat indirect taxation though, in which there's no income tax just very high sales tax with rebates on essential items, might work, but only if you introduced it in every country at once.

  • rate this
    +3

    Comment number 117.

    It is a non starter because it would be impossible to finance our states public expenditure and provide all that is provided that makes our state a civilised place to live.

    For a fairer society, for taxes to change, would mean that pay structures would also need to change, BETTER distribution of pay/wealth is the KEY to a fairer tax system.

  • rate this
    +3

    Comment number 116.

    The flat tax site http://www.2020tax.org/ says make basic rate tax 30% and make the personal allowance £10,000. So those paying the current 20% basic rate tax would be worse off and those paying 40% rate would be better off. Hasn't won me over!

  • rate this
    +4

    Comment number 115.

    The arguments from the second man Richard Murphy have more examples (he actually uses examples) and is a better, more thought out example.

    And he also doesn't work for Boris Johnson my partner pointed out!

  • rate this
    -19

    Comment number 114.

    I pay more than £10k in tax and NI, because I've worked hard and got qualifications, and earn a salary appropriate to those efforts. Why should someone who hasn't tried very hard pay nothing just because they don't earn very much? Why should millionaires pay nearly 50% of their salary to fund a system they are opposed to just because they live here? I don't think that's "fair" at all.

  • rate this
    -1

    Comment number 113.

    We're falling into the trap here of believing that the whole process could easily be simpler, but some group (lefties, righties, corporations, unions or whoever) is preventing it. If flat tax were as simple as made out, then it would have happened. There are a lot of opinions here from people who don't understand tax (about 99% of the population), but still assume it must be simple to fix.

 

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