Flat tax flattened

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August 2, 2014 by Paul Goldsmith

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Amusingly, Oliver Letwin, one of David Cameron’s closest advisors, has been reported by the Daily Mirror as having suggested that the Tories would be pushing for a ‘flat tax’ on income in the near future. Now, if you actually listen to the tape, or read the transcript, you will find that he actually said nothing of the sort, other than to talk about the loss of revenue that a flat tax would cause. But that didn’t stop a day of discussion about the policy, with the left shrilly shouting from the roof tops about how it was a gift to the rich and ‘same old Tories’ and the right trying their hardest to explain how lowering the tax rate for those on the highest income and raising it for those on the lowest incomes would help the poor.

At the moment our income tax regime is what is known as ‘progressive’, which means that the more you earn, the higher rate of tax you pay. No one pays tax on their first 10000 of earnings, then people pay 20% on the next 33000, 40% on the next 107000 and 45% on everything else. It can be complicated to calculate but it is generally seen as ‘fair’ that those who have the ‘broadest shoulders’ carry the greater burden in tax.

However, those who argue for a flat tax say that the complications in our current tax regime encourages tax avoidance. This reduces revenue to the government. If there was a flat tax on all income, set at say 30%, those on high incomes, who after all can afford the accountants who come up with their tax avoidance schemes, will instead just pay that lower rate of tax. With no incentive to declare their income as below a certain threshold. Also, freed from the time it takes to keep up with a complicated tax code, the Inland Revenue can spend more time on chasing tax avoidance and evasion. The extra revenue that could apparently be collected from this could be used to raise the threshold before which any tax is paid at all. Thus the flat tax helps the poor.

The left would argue that there are a lot of assumptions in that paragraph above. It is quite hard to see how a flat tax that raises the income tax those on lower incomes have to pay from 20% to whatever it would have to be in order to not lose too much revenue really helps the poor! particularly the working poor. It is also very hard to see how a change in tax that reduces the tax rate that those on high incomes have to pay so much could ever help those on low incomes. It is also hard to accept that such an incentives needs to happen just to stop people avoiding their civic duty of paying taxes. Most of all, the left would argue that there are precisely no countries where a flat tax regime operates.

To go back to the start of this blog, Oliver Letwin didn’t actually say that a flat tax would be brought in or that the Conservatives were even thinking about it. He was also speaking at a private meeting of a think tank in which the whole point is for ideas to be floated and discussed. Well, it got floated, and, even though UKIP have also mentioned the flat tax, making it tempting for the Tories as they continue to try and find ways to bring UKIP voters back, it looks like it won’t swim.

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