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Friday, August 19, 2005

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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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