Flatter To Deceive

by Quinn

People cleverer than I have been discussing the issue of a flat tax across medias both new and old recently. It is a subject that interests me, and although I don’t have a detailed knowledge of the ins and outs of the tax, I do have an opinion.

Simply put, the idea of a flat tax is to replace the current tiered levels of income tax, which increases from 10%, through 22% and up to 40% as income rises, with a single tax rate regardless of how much one earns. Instinctively I would expect to oppose such a move as it not a progressive system of taxation where the richest pay a higher proportion of their income in tax; but the matter is not that simple. Proponents of a flat tax tend to favour a higher personal allowance, of around £10,000-£15,000 rather than our current £4895; as the poorer one is, the larger proportion of your income is made up of the untaxed personal allowance, there is still a level of proportionality to the tax. In addition, with a simplified taxation system there are fewer places for the rich and their accountants to hide their wealth in a thicket of tax loopholes, and levels of compliance increase; this is another way in which the flat tax can in fact be considered fairer to the poor. An accountant friend of mine tells me that there are slim picking these day for those trying to avoid tax; but still, I do think that a flat tax has much to commend it, more than I initially thought I would.

Not surprisingly my pals at the Daily Mail also find the flat tax an interesting idea, although I suspect for rather different reasons to mine. I imagine that some of the things that attract me to the flat tax are the sorts of things that cause the Mail to have reservations, but we cannot always choose our allies and we certainly can’t choose their motivations. However, there remains a problem for the Mail.

When the Adam Smith Institute advocated a 22% flat tax with a £12,000 personal allowance its studies showed that no one would be worse off financially as a consequence. Unfortunately, such a system would accrue only £88 billion in revenues to the treasury rather than the £138 billion currently raised by income tax. Doubtless the ASI don’t see that as too much of a problem, believing that government takes too much money from us all in the first place. Secondly, it is argued that the greater economic efficiencies and incentives resulting from a flat tax will make up this shortfall in revenue (as people are not penalised for working harder and earning more money) and indeed they may do; but they may not. I know the ASI is interested in deregulating gambling (well, they are interested in deregulating pretty much everything, and so support deregulating gambling as a consequence) but to gamble with the finances of the country seems a bit risky to me.

The Economist then commissioned a study into the flat tax to see what would be the result if it was introduced at a level that was revenue neutral (ie. raised the same amount of revenue as is collected by the current system of income tax). It found that there could be a flat tax with a rate of 30% and a personal allowance of £10,000. Those earning less than around £20,000 and more than £50,000 were better off as a result of this change. Unfortunately for the Mail, the people in the middle-income group (earning between £20,000 and £50,000) would end up paying more in tax; these are the very inhabitants of “middle England” that the Mail claims to represent and who pays its wages, the same people who the Mail currently consistently complains are being clobbered by the government and its numerous stealth taxes.

So the Daily Mail will ultimately probably not charge the barricades demanding a flat tax, and if the figures above do accurately show how it would work in practice, then it looks a less enticing prospect than it does in theory.

But of course there is one way we could get a flatter (if not flat) tax tomorrow, and that is simply by combining income tax with the employees national insurance contribution. Then, rather than having an incentive-denting leap in tax rates from the standard 22% to the whopping top rate of 40%, we would instead find that our tax on income only rises from 33% (22% income tax, 11% NI) to 41% (40% income tax and 1%NI) at the top level. Perhaps if we did this, and publicised this “change” in our tax regime, then we would reap some of the benefits the ASI think will come from abandoning a system that so penalises those who work harder. Do you reckon?

I still think the flat tax has much to recommend it, especially when, as I have just explained, the current system is not as progressive as it is sometimes painted; even less progressive when you consider other taxes such as VAT and the Council Tax. I am still quite attracted to the theory; but at the moment I need to know a little bit more about the facts.