Wednesday, May 25, 2011

Steve Baker MP wants a simpler flat tax system. WHY?

The Daily Politics BBC News reports on the spaghetti like complexity of our tax laws. No news there. What did surprise me though was the brief interview included in the piece with Conservative MP Steve Baker who advocates the benefits of a flat tax system and then reveals he doesn't understand the implications.

He was referring to a change to the income tax system. It would involve everyone paying income tax at the same rate with no reliefs or deductions other than a single personal allowance. So whether you earned £1,000 above the allowance, £10,000 above it, £100,000 above it or £1m above it you would pay the same rate of tax on your income.

This idea is not new. Back in 2005 the Conservative party commissioned an investigation into the possibility of introducing a flat tax system in the UK. Such a proposal was not in either of the Coalition parties' election manifestos. But the idea of a flat tax does 'sound' like it should lead to a simplification of the tax system. Which of course is part of the attraction.

What Steve Baker MP said in the interview though makes no sense:
"A flat tax....would be likely, based on the evidence, to raise a greater amount of revenue."
Clearly this will depend on the precise rate of tax. And if does raise more money then who will be paying that extra tax? Not the top rate taxpayers who would no longer be paying tax at 40% and 50%. On that basis alone it's a disgraceful suggestion.

In 2007 Richard Teather published a model in 'A Flat Tax For the UK - A Practical Reality'. He assumed a 22% flat rate of tax and a £12,000 personal allowance to balance the equation. It leaves no losers, ensures that those on just-below average incomes benefit most, and sees that the poorest third of all earners gain proportionately more than the richest third. Sadly it is also £50 billion short of cost neutrality. More recent estimates anticipate that we would need a 25% flat rate of income tax payable by everyone on all of their taxable income.

Like many people I'm keen to support ideas that would genuinely lead to a simplification of our tax system. Such developments would reduce the incentive and opportunities to engage in what are now known as 'abusive' tax avoidance schemes. A flat tax is appealing in theory. But only in theory. A bit like having a chocolate bath.

Key arguments here include:
  • Graduates would pay the highest effective rate of tax when their student loan repayments are added to their flat tax;
  • The tax burden would fall more on the 'squeezed' middle than at present due to the drop in the the 50% and 40% higher rates of tax down to the flat tax level; and
  • The so-called success of flat rate tax systems elsewhere are unproven.
Other arguments are, I think, more about stressing the practical difficulties of implementing such a system. They are not insurmountable. None are. But frankly I don't see it happening in the foreseeable future.


  1. Let's not forget, it's not "simpler". You still have a bewildering array of confusing data regarding what is taxable and what is not, what business expenses would be allowed or not, whether that payment you recieved on 6 Apr 2011 is attributable to the 2011 tax year or the 2010 tax year, whether that offshore gift from Uncle Eddie is in fact a payment for services rendered or not, etc., etc., etc. Just as much work for accountants. Just as much work for businesses. Just as much headache for taxpayers. And less fair on the poor. Brill.

  2. Couldn't figure out how to sign - Liz Zitzow

  3. Mark, you are spot on here and it is worrying that many of the proponents of flat tax systems have no idea what they are talking about - perhaps especially when it's an MP. Others (the Tea party tendency) would be quite happy for the tax burden to be shifted downwards.