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Flat taxes are seductive. They play well with politicians, the electorate and businesses. They are simple, cheap to administer and, by some definitions, egalitarian.
They have already won influential admirers. In the last decade or so,
Estonia, Georgia, Latvia, Lithuania, Romania, Russia, Serbia, Slovakia and
Ukraine have all adopted personal income flat taxes. In Germany, the idea
promises to have an important bearing on Sunday’s election result. And as far
away as Canada, flat taxes are prompting serious discussion.
Domestically the subject is also on the agenda. Some senior Conservatives
believe the idea can restore their electoral fortunes. It’s no surprise,
according to the right-leaning Centre for Policy Studies: ‘Advocacy of a flat
tax presses all the right buttons. It is good for the economy. It is good for
the poor. It is good for business. And it is easy to grasp.’
But a flat tax begs as many questions as it answers. What should the rate be?
Former eastern bloc countries believe 12-19% is appropriate. And what should the
impact on indirect taxes be? In the UK, the wealthiest 20% of households pay 35%
of their incomes in tax, the poorest 20% pay 37.9% of their incomes in tax.
Indirect taxes have even an even more disproportionate impact on the poorest
households.
No matter how sensible such a move might appear superficially, though, a
major switch from indirect to direct taxation is political suicide. What happens
to the thousands of allowances, deductions and reliefs that litter the system?
No political party is likely to abolish these entirely, as many exist as a means
to a legitimate non-fiscal end – from health to environmental policy.
Then there is the impact on the Exchequer. Under the current (extraordinarily
complicated) system, the impact on the Treasury tax take is somewhat cushioned
in times of recession. The electorate, by and large, stays in the dark. So it
would take a brave politician to overhaul the tax system fundamentally.
Fortunately for the Conservatives (and indeed Labour), Germany may provide a
real-life example of reasonable comparability. If the conservatives win this
weekend’s election there, and and if leader Angela Merkel and the man dubbed as
Germany’s next finance minister, Paul Kirchhof, are brave enough to deliver on
the flat-tax ideas they have floated in opposition, it will be a fascinating
experiment to watch.
Just don’t expect anyone to take a maverick line here should change fail to
materialise.