Why not... introduce a flat tax?
- 3 July 2013
- From the section UK Politics
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.
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.
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.