There has been a lot in the press for some time now about the issue of flat tax. The Adam Smith institute has written a paper on flat tax proposals for the UK. The Shadow Chancellor has decided to set up a commission to examine the pros and cons. The fact that it has set the Labour advisors into a very fast spinning process probably also means it is worth examining.
In a nutshell it seems to mean a massive simplification of the taxation system so that you have only one rate of tax and no allowances. If flatter tax means simpler tax then there will be many who will find this appealing.
To offset the disbenefit this would have on low and middle income earners there would be a relatively high threshold at which no tax would be paid. There figures vary from proposal to proposal but the threshold being talked of at present is between £10k and £12k. The benefit of this is obviously that quite a large number of people would pay no tax at all; large numbers of pensioners, those on benefit or in part time jobs that currently pay when over the current low threshold of about £4k.
Sounds good you say? Those against the idea believe that this is unfair as it benefits those on high incomes who will pay less. One of the oddities of this argument, and the current tax system, which I have never understood, is that when you have a system based on percentages of gross income then the richer always pay more tax. Surely those on the left ought to be arguing that having everyone paying the same rate of tax is fairer for all, in the same way having comprehensive education is supposedly giving the same level of education to all, regardless of a students relative strengths and weaknesses. (In passing I do not believe the comprehensive system has worked precisely because the weakest and poorest have ended up being pushed out of the most successful schools by kids with wealthier more mobile parents. Wealth creates mobility. At least with the Grammar Schools ability was the deciding factor not wealth - Greenwich judgement aside)
Above all this is the issue that in countries where they have introduced flat tax their productivity and growth has risen sharply. What is difficult to ascertain is whether this is because of flat tax or just their normal economic growth pattern.
I think examining this system is probably a good idea. It is politically “trendy” at the moment to say it should be looked at and I think it is responsible to rule it out or in as an idea. Incidentally, I gather that the Government have looked at it but refused to publish the section that said whether it was a good or bad idea; something to hide?
2 comments:
You recall I chucked you an email on Flat Tax a while ago,and you promised to check it out,so well done.
My view is that what is required is that all tax payers are taxed at the same proportion.
Thus with flat tax one can raise the threshold so that low earners say below £20,000 pay virtually no tax and ALL above pay at a sensible rate between 22% and 40%.This tends to make tax avoidance schemes not worth the effort,does not penalise anyone who strives to own a business or rise into higher income levels.
The more you earn the more tax you pay until,under the current system.you employs accountants to find ways of avoiding the burden.
The country MUST reward all those prepared to risk and work hard for ultimately ALL folks will get a better deal.
Unemployment will drop as it becomes much better to work rather than lose out when moving from benefits to relatively low pay which currently attracts income tax if one earns the equivalent of shelf filling on 48 Sundays at the local supermarket.
Lets have a proper non biased forensic financial review of Flat Tax,it may not be the panacea for the Uk just because it has worked well in e/europe,but my guess is that we could benefit from many of it practices and any simplification of the current mess must be welcomed.......except by Brown of course who relies on ignorance and confusion to bamboozle.
Well maybe there is a university dissertation in here somewhere? Trouble is probably not much use if you are studying geography!
The issue you raise about high tax earners is an interesting one. I promise I am not a tax expert but I think the argument goes something like this. As it stands today you do not pay 40% on your entire income, only the amount over a set figure (maybe wrong but think it is mid £30k's). Couple the effect of now paying this new amount on all you earn over £12k, scrapping of all the allowances that it seems only the wealthy seem to claim (such as Share schemes, CGT, Termination payments, relocation expenses, professional subscritpitons etc etc), and suddenly more of the income of the current 40% tax payer is now open to tax. From the fag packet calculations I have done on a £100k earner they end up paying about the same tax. However, those on average incomes would have only half their salary subject to taxation due to the generous opening allowance of £12k approx!
But, you ask, that means less money for the Government to spend. Under the ASI scheme there would be £50bn less income to the Government (less than 5% of GDP) but this is offset by the £12bn you save from not paying all those tax reliefs (some of which I have listed above).
In addition the ASI argue that the stimulation in growth that this will bring about, coupled with the disinclination (you could arge 'difficulty') with tax avoidance due to very few reliefs, and it would mean the economy rebalancing within three years.
Can you think how much smaller we could make the Inland revenue?
Still this is a very 'taxing' subject and one which I am sure we shall hear more of.
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