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Originally posted by Captain
I'm sorry. I thought this style was intentional. Do you have an interest in participating in substantive discussions?
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Thank you for this second chance. I will try to earn it.
Say if you were starting a country, what type tax system would you put in place? I'm not sure what I would want, but one thing for sure, I wouldn't want a flat tax!
Taxes paid by the subjects of a state, as Adam Smith, the Scottish father of economics once wrote, should be in proportion “to the revenue they respectively enjoy under the protection of the state” and should be “clear and plain to the contributor and to every other person”.
Compare those statements of principle to the arcane, over-complex, labyrinthine reality of taxes today, and it is little wonder that people are looking for a radical alternative, a breath of fresh air on the subject.
Whatever his good points in his stewardship of the economy over the last eight years, Gordon Brown has certainly done much to make the tax system over-fussy and complex, albeit with (on most occasions) good intention.
Anyone who doubts this should compare the latest edition of Tolley’s Yellow Tax Handbook which contains all the tax legislation for the current tax year (2005-06). This now runs to four hefty volumes and is about double the size of the equivalent volume for the first year of Brown’s Chancellorship.
In this, his supporters may argue, he was only continuing a trend. Just so, but the current occupant of Number 11 has added considerably to the pages and his department has just produced its biggest blunder in the area: the tax credit system for the poorest families, which was described the other day as a “nightmare” system by a parliamentary committee.
This, of course, is not an academic subject, as those of you who are beginning to grapple with your tax return ahead of the September 30 Inland Revenue deadline for self-assessment tax returns will know to your (likely) personal pain. (For help with just that issue, see the back page with some good advice from my colleague Nic Cicutti).
There are areas of the tax system that are ridiculously complex and even accountants are left scratching their heads about the logic of some particular provisions.
So it is perhaps little surprise that a radical plan to sweep all that away and replace it with a flat tax is currently gaining support in a number of quarters.
It is rising up the political agenda too, with George Osborne, Shadow Chancellor and close ally of Tory party leadership contender David Cameron, calling for a commission to examine this as an alternative to the current system.
The idea is that the current plethora of income tax rates, allowances and complicated formulas would be swept away and in its place would be put a single, low rate of tax, starting at a high threshold.
Now the social purpose of political leadership contests – apart from being a good spectator sport and a chance to wager some of your hard-earned cash, be you so inclined – is to run new ideas up the flagpole to see if anyone salutes.
Osborne put forward the idea of a flat tax after visiting Estonia, where one has been in operation since 1994 (so it seems there is only one tax in Tallinn as well as being one team). Estonia’s example has been followed by other European countries, with Poland looking at the possibility of following suit.
The introduction would mean replacing the current three tax rates (10% on the first £2090, 22% on the next £30,310 and 40% on everything above that) with a single rate. At the same time, the tax-free personal allowance would be stepped up above its current rate of £4895.
This would result in a whole load of economic benefits, according to the flat-tax supporters. Not least, cutting back the tax legislation to a much more manageable volume. Multiply that loads of times over throughout the tax system and you cut out a lot of cost.
But the major social advantage of the scheme, according to its exponents, is that a lot of low-paid people would be withdrawn from the ranks of taxpayers altogether.
This would help to turn back one of the effects of the Brown years at the Treasury, which has seen the number of income taxpayers rise from 26.2 million to 30.5 million.
It would also result in economic benefits, supporters argue: as people saw less of their hard-earned cash go to the taxman, they would be willing to do more and this would encourage a new dynamism in the economy.
So, in other words, a flat tax would, in theory, take the poorest out of those taxed altogether and it would at the same time encourage wealth creation – if you cut the flat tax in half, it would have the words compassionate Conservative written all the way through it.
But there are big questions about whether all of those theoretical benefits would actually come good in practice. Among the proponents of the flat tax is the Adam Smith Institute, a somewhat controversial holder of the great man’s name. Remember, these are the same people who argued that the poll tax was the panacea for all ills.
Opponents to the new idea have argued that the economics just do not stack up. A £10,000 tax threshold, for example, combined with a flat tax rate of 20% would leave a £50 billion hole in public finances. That is a very big hole to fill with the results of a new dynamic economy – in other words, a very big political leap of faith for any Chancellor.
To be fair to Osborne, he is arguing for a flatter tax system rather than an out and out flat tax. But he has, as Philip Stephens has pointed out in the Financial Times, set a political hare running.
The biggest problem with the flat tax then is that it is simply too tempting an idea in principle but looks dubious in practice.
How great to introduce one bold measure and change the system in one fell swoop. Unfortunately, that is a smokescreen that diverts from the need to sort our public services, limit government to an appropriate and affordable size and have it paid for accordingly. That is the real task facing the current government and, no doubt, the next one.
So, in its simplest form, a flat tax does not look likely to work, although workable proposals for simplifying the tax system would be welcome. But the devil is in the detail.
So it is back to the drawing board, but then as Edmund Burke said: “To tax and to please, no more than to love and to be wise, is not given to men.”
But I have taken the floor for too long. This forum is about the exchange of ideas. What do you think?
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