Just over a fortnight ago I mentioned the new Adam Smith Institute report calling for a flat tax in the UK. The Institute gave it another plug on their weblog last week, and Gary Duncan has discussed it in The Times of March 29 in a piece called Shallow populism stifles taxation debate. He summarises the potential advantages thus: "Distortions are removed, disincentives eradicated, complexity swept away, double taxation of savings eliminated and compliance costs cut." Duncan makes three important points about a flat tax. First, tax and investment competition:
The move to flat tax in Eastern Europe has thrown down the gauntlet to Western European governments, which confront the risk that jobs and investment will gravitate to more attractive, low-tax competitors.
Second, he reminds us that it's a lot easier to introduce a flat income and company tax in "smaller economies in a state of transition .. in Eastern Europe" than in "a big, developed economy such as the UK [which] would be immensely challenging".
Third, even if governments consider a flat tax "too scary to offer to a skittish electorate, there are plenty of less daunting alternatives. As Mr Martin argues in his pamphlet, the tax regime could be drastically simplified even within the bounds of the existing, progressive framework of bands and allowances."
I also favour simplification of the income and company tax systems. But I'm sceptical about whether there really would be significant net gains from moving to a flat tax in the UK. Tim Worstall, in commenting on my previous blog on this topic, made the point that cutting taxes for low income earners could boost happiness:
I don’t think those on less than about 10k should be paying income tax or NI. There’s even a leftish justification for that in Richard Layard’s numbers on happiness. Up to about $20 k dollars a year happiness increases with rising income. It’s as good a justification as anything else for a moral basis for taxation.
It would be nice to tax low income earners less. But that raises the perennial problem with any major tax refirm - who would pay? If a flat tax was introduced into the UK with a high zero tax threshold, low earners would pay less tax. So too would the rich, benefiting from lower marginal rates. Assuming the change is designed to be revenue neutral, then middle income earners would have to pay more tax. Hard to see how that would be acceptable to politicians or voters...
Of course the not-so-hidden agenda of many flat tax advocates is not principally a simpler tax system. It is lower taxes and a smaller state. But if that's their core agenda, they should say so - and identify what public services they would cut.
There is little evidence of such a taxpayer revolt in the UK. Indeed, the remarkable thing about the current political era is the degree to which the public - and the Conservative Party - have accepted Labour's agenda of higher public spending. As Gary Duncan notes in his article:
Labour’s bold second-term gamble on trying to shift the terms of electoral debate decisively in favour of a tax-and-spend strategy seems to continue to pay off. Despite ministers’ substitution of well-intentioned rhetoric for reforms in the state sector, the public seems content to wait to see whether Mr Brown’s billions deliver meaningful improvements in services.
Until that public mood shifts, advocates of a flat tax in the UK will continue to receive short shrift.
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