Treasury rejects calls for UK flat tax

A flat tax regime that dictates the same rate of tax on all income is misleading and unsubstantiated, according to Treasury documents released under the Freedom of Information Act.

Interest in one single rate of income tax, currently in place in Hong Kong, Russia and eastern Europe, has blossomed in recent months with high-profile calls of support from the Conservative Party and the Adam Smith Institute, the free market think-tank.

Both claim the introduction of one unified tax on all incomes would be a simpler, more transparent solution, serving to boost revenues for the Government, more than the current regime with its array of tax charges.

George Osborne, the shadow chancellor, has recently renewed the call for flat taxes by praising their adoption in several eastern European countries; Lithuania, Latvia & Estonia to name just a few.

Adding weight to the Tory appeal, Lord Pattern told his peers in June that flat taxes would represent a departure from “our ludicrously complex and costly taxation system.”

According to the Financial Times, he argued that one unified rate of income tax would be simple, transparent and result in less tax advisors and fewer civil servants. It would also act as a stimulus for investment, he said.

Madsen Pirie, president of the Adam Smith Institute, one of the most vocal advocates of flat taxes, told The Times in November last year that Britain’s time had come to adopt a 20 per cent rate, in a bid to replace the plethora of existing rates, allowances and reliefs.

Furthermore, flat tax advocates claim revenues for the Government would increase, as compliance costs and the need for avoidance decline under a system defined by less economic distortion.

Yet the Treasury is unconvinced. It says that evidence for a low rate of tax as a means to create more compliance and economic activity “is at best mixed.”

Moreover, advocates of flat tax structures were so fierce about making their case for the UK, “because so little hard evidence exists to support the pro-flat tax claims.”

Arguing about a reduced compliance as a result of flat taxes was dubbed “misleading”, with the Treasury citing the UK as higher in the economic maturity stakes than Baltic countries that had ushered in a flat tax regime alongside other reforms.

The Treasury also had difficulty accepting claims that flat taxes were progressive. “Flat tax [advocates] have to face up to the reality that such a system is tough on the low paid unless you spend a lot of money on generous personal allowances or a very low rate of tax – or both.”

Nick Herbert however, of the think-tank Reform, believes that introducing a flat tax system has “immense” gains including the abolition of separate taxes and “complicating reliefs.”

“Tax evasion is reduced as activity is shifted from the black to the legitimate economy,” argues Herbert, as just one in a long line of advantages of single rate income tax.

“The system becomes more transparent and less vulnerable to stealth taxes. Tax on savings can be abolished. Billions can be saved in compliance costs. A tax return can be filled in on the back of a postcard.”

Such advantages, he says, are already reaping real-world rewards for global economies as the flat tax, typically between 10 and 20 per cent, gains momentum.

“President Putin introduced a 13 per cent flat personal tax rate in Russia. Tax revenues doubled,” Herbert says. “The revolution soon spread to Serbia, the Ukraine, Slovakia, Georgia and Romania.”

Yet once again, Treasury papers reveal the case for a low-rate flat tax is far from proven in the eyes of the UK government. In the newly released analysis, officials highlight an IMF paper questioning whether increases in Russia’s revenues could be solely down to its 13 per cent levy.

They concluded that arguing general economic improvements would spiral from the highest to low and middle income earners would require “heroic assumptions.”


11th August 2005

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