It isn’t just Tories like George Osborne and free-market fundies (pdf) who are interested in flat taxes. As Phil’s recent piece shows, liberal-minded types, including lefties like me, are also keen. Okay, it isn’t an egalitarian utopia, but once we all get over the visceral reaction that a non-progressive tax system must be “unfair”, the benefits are obvious. A high tax-free allowance can help correct the ludicrous situation we’re in now, where poor families are taxed a higher share of their income than the rich. And where low-income families face marginal tax rates of 91.5%, as recent DWP data revealed. Our tax system might be tagged “progressive”, but it’s in name only. A long-broken promise.
Closing loopholes, partly by making the system simpler, should reduce escapees at the top end. These aren’t tax evading criminals to be hunted down, as Johann Hari implies, but economic agents taking rational advantage of the unnecessary web of complexity. While confusion, and tax codes long enough to fill a small library, remain, the rich will thrive while staying on the right side of legality. Making full use of every one of the 39 different tax rates on capital gains, for instance.
On top of that, flat-tax transparency makes it harder for governments to ferret tax increases away, out of sight. Plus: anyone filled out a tax return lately? All those sections and subsections, and locked-down online forms, with various reliefs and different rates of taxation… It all has to be read by someone, someone whose salary we’re paying: numbers of tax inspectors are growing at twice the rate of doctors and nurses. Who gains from this? Not ordinary punters, what used to be called the “working classes”, that’s for sure.
But Mr Osborne, coming at the issue from the Right, has at least three major challenges on his hands. The first is political: does anyone believe his party can be trusted to look after lower-income families, as he claims? It rarely has in the past. A high, headline-grabbing tax-free allowance, an immediate benefit to poorer earners, could allay these fears. As Chris explains, it will sacrifice a little efficiency, to the gain of equality, and probably saleability. That’s a gift to redistribution’s True Believers: the left.
The second is economic. Caving in too often to the inevitable pleading for special cases, reliefs and exemptions, will destroy the big advantage of a flat tax: its simplicity. Mr Osborne will need to hold firm or the project is doomed before take-off. I doubt he, or any other politician, has the spine. In the face of a wilfully idiotic press corps, it may not even be achievable, or electable.
Third, and hardest of all, he’ll need to get to work changing the mind-set of Middle England. I don’t know anyone who would be happy for Peter Mandelson to choose their bra, but the deal with the Chinese over textile imports this week has allowed just that. And hardly a disgruntled peep from the media: we Brits think the state is our friend, that it acts wisely, spends our money carefully. That it will be there when we need it. Just look across the Atlantic, at shambolic, sclerotic government on every level after Katrina: this isn’t the case. Getting to keep more of our money, especially for those of us who don’t earn much, is a good thing.
(With thanks to the Evening Standard.)