The case for a flat tax

The case for a flat tax

In recent months tax has been a hot issue, in particular tax avoidance.  You will have noticed the media fury at big companies such as Google and Amazon failing to pay their fair share of tax, and the current state of anger at the rich paying accountants to avoid paying tax.  Although these things are morally wrong they are not legally wrong, and this is because of loopholes in our highly complex tax system, the between 1997 and 2010 the Labour government create an extra 5000 pages of tax rules and regulation on top of what already existed. 

Tax avoidance is a real problem and the TUC says individual tax avoidance costs the treasury around £13 billion per year, and £12 billion in lost tax from business.  To put this in perspective benefit fraud only costs the treasury around £1 billion per year so it is a big problem.  Many will call for the government to close tax loopholes and the government is doing this but it is not easy as the law surrounding tax is so complex that accountants just find other ways for their clients to dodge tax.  I see two solutions to this problem the first is for the government to close each loophole as they crop up, however this would be very slow work possibly going on forever as every time a new tax law is passed it could potentially create new loopholes.  The second option would be the creation of a flat income tax for all individuals and a flat business tax for all business.

A flat tax is not just a good theory it works in practice countries such as Slovakia and Russia as well as some states in the USA have implemented a flat income tax, and have found tax receipts have increased and tax avoidance has decreased.  This is not surprising as a simple tax system has very few or even no tax loopholes.  Also a simplified system would save HMRC the £55 million they spend each year helping people fill in their tax forms.  The Economist also supports a flat tax and in when featuring an article about Slovakia’s tax system it said it ‘helped to spur foreign investment and economic growth, actually leading to a slight increase in tax revenue.’   The next question is what level would the flat tax be set at, Edward Leigh MP says in The Future of Conservatism, Values Revisited that a flat tax of 22% with a personal allowance of £15,000 would result in a reduction in tax revenue of £62 billion in the first year of the new tax.  However, the taxpayers alliance says that the tax loop holes which would be closed by the flat tax could raise an extra £81 billion of tax revenue and the removal of tax deductions and allowances would raise an extra £18 billion, so the treasury would actually make more money through tax that it currently does.

The biggest argument facing a flat tax is one of fairness, the current progressive system of taxation is seen as fair as the rich pay more than the poor, and some would argue that making the poor pay the same as the rich would be unfair.  Well this argument does not really stand up firstly those on the lowest incomes would be given a generous personal allowance of £15,000 which is more than they currently get.  Plus the tax would stamp out tax avoidance would be stamped out meaning the rich would contribute more in tax than they currently do.  Everyone would benefit from a flat tax the many would receive a tax cut and a large one at that and those who currently pay the basic rate and would be receiving a 2% tax rise would be compensated with an increased personal allowance which would be about £5000 more than the current personal allowance.  A flat tax would also boost the economy for the simple reason tax receipts rise when tax is cut because more people come to do business in your country, this was the case when Thatcher cut the top rate of tax from 83% to 40% and it was the reason Tony Blair did not increase taxes.  Also, a flat tax fits with the governments message of making work pay as many people on low paid jobs would pay no income tax at all which will make work more attractive to those stuck on benefits.  A final point to make is that as the global market gets more and more competitive, the UK needs a tax system that encourages businesses and entrepreneurs to come to this country, and if we happen to leave the EU being competitive in the global market will be crucial if the UK wants to continue to thrive and grow.