Flat tax in the UK, part 4: Treasury's views disclosed

HM Treasury recently released documents on a flat tax, under new freedom of information disclosure rules. The problem is that according to a story by George Trefgarnein today's Daily Telegraph, The flat tax secrets that worried Brown did not want us to see (registration required), they have been censored:

The original version of secret work by officials posted on the Treasury website - after freedom of information request - pooh-poohed the claims of flat tax advocates as "misleading". But large parts of the work had been removed. The complete version reveals that most, but not all, of the elements which were blacked out present compelling arguments in favour of the flat tax.

Under the Freedom of Information Act, such excisions have to be approved by ministers or senior officials, so the inevitable conclusions are: first, that Treasury mandarins are privately taken by the flat tax idea; and second, the Chancellor fears that this could hand a powerful weapon to the Tories.

However not all the excisions were of text favouring a flat tax. For example:

"Proponents of a flat tax have to face up to the reality that such a system is tough on the low paid unless you spend a lot of money on generous personal allowances or a very low rate of tax, or both."

Treasury pointed out that not only would tax credits have to go under such a scheme, but also "important tax reliefs" such as "age related allowances" would be scrapped, leaving many pensioners facing a tax increase. It's a pity the full documents were not released, so we could have been given a more nuanced and balanced perspective.

(For my previous entries on the UK flat tax debate please see here, here and here).

UPDATE: Until I saw this morning's print edition, I did not realise that the Daily Telegraph also made this its front page lead story, Treasury blocks move to flat rate, by George Jones and George Trefgarne:

The uncensored paper seen by The Daily Telegraph presents a more balanced picture, acknowledging that a flat tax could increase economic activity and tax revenue, making Britain more attractive to foreign investors. It could create a "mini-economic boom" and would "eliminate distortions", the paper says.

Ah, the joys of internet news searches.

UPDATE 2: Dr Madsen Pirie at the Adam Smith Institute, Tim Worstall and Gavin Kennedy have also blogged about the story. Pirie writes:

Conservative shadow chancellor George Osborne accused the Treasury of "seeking to mislead the public." It is difficult to see it as anything else.

And Chris Dillow at Stumbling and Mumbling thinks it might encourage small government:

I suspect one motive for wanting a flat tax is that it would increase the political pressure for smaller government by making the cost of the state more transparent, especially to lower earners. Personally, I have no problem with this. As I've said ..big government is an obstacle to income equality.

On motive he is probably right. But the issue is perhaps more complex. Chris also asks: "Should egalitarians therefore really be opposed to a flat tax?" Yes, I think they probably should. It would be quite difficult to design a revenue-neutral flat tax that didn't reduce the income tax paid by high-income earners. If the tax scales also ensured low-income earners were no worse off, then middle-income taxpayers would be the losers. That would be a hard sell politically, and quite inegalitarian.

The onus is on the proponents of a flat tax is to show how it could be introduced into the UK without further enriching the already wealthy, or making the poor worse off. If that can be demonstrated, and it was revenue neutral, then I'd support it. 

Comments

[Martin]

More details about the FOI angle of this story are here.

[Suvi]

"It would be quite difficult to design a revenue-neutral flat tax that didn't reduce the income tax paid by high-income earners. If the tax scales also ensured low-income earners were no worse off, then middle-income taxpayers would be the losers."

But a flat-tax doesn't have tax scales, New Economist. "Flat" means they all pay the same rate.

Please explain further.

[New Economist]

Suvi

What I mean is that - provided one wishes to maintain revenue neutrality, an important proviso - it would be extremely difficult for the UK government to move from their current progressive income tax scales to a flat personal income tax rate without the rich ending up paying less and the middle class paying more income tax. As I say above, "middle-income taxpayers would be the losers".

I again challenge anyone to come up with a set of tax scales that can achieve this; I doubt anyone can.

The situation of lower income taxpayers is different. If a sufficiently generous tax-free threshold is introduced alongside the flat tax rate, then some working poor could end up better off than now. But again, if revenue neutral is to be maintained then someone has to pay for it - and it certainly won't be the rich. It would be the middle class.

A flat tax rate would be political suicide in most Western democracies, provided the income of the median voter is not too far from the income of the median household (the US is one possible exception here). That is why even Britain's Tory party have just rejected such proposals. See my latest post: Tories reject flat tax

Of course many flat tax advocates believe in smaller government and want to slash public spending. That could conceivably pay for the tax cuts they promise, though it would also mean worse public services. Unfortunately, flat taxers are often quite covert (if not downright deceitful) about this agenda, pretending that simpler tax scales would somewhow unleash hundreds of billions of pounds in to the Exchequer's coffers. It wouldn't. That is a libertarian fantasy.

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