Flat Tax and New Labour Spin

Interesting article (yes I know it's the Torygraph but it's a good read):

Source: http://www.telegraph.co.uk/opinion/...xml&sSheet=/opinion/2005/08/29/ixopinion.html

"Ask any politician about the possibility of having a flat tax in Britain, and they furrow their brow and say: "Hmm. Interesting idea. But it's just a tax cut for the rich isn't it? That's a tough sell." If they are a Conservative, they then descend into discussing the party's interminable leadership election (stay awake at the back).

Such a parochial attitude may soon be dispelled. The flat tax - where all exemptions and allowances are abolished and everyone pays the same rate - is marching across Europe, just as other ideas have conquered the Continent once every generation or so.

This time, the revolution is being driven not by the loathing of communism or of some ancien regime, but by that mysterious magic of markets: competition.

A flat tax regime has been adopted in 11 countries and counting. As each citadel falls, another is forced to respond to the new-found vigour of its neighbour. Next up is Greece, where the prime minister could announce one in a few weeks' time. Greece has unbelievably rickety public finances and the hope is that a flat tax rate of 25 per cent will revive the moribund economy, reduce evasion, attract high earners and send revenues pouring into the coffers of Athens.

But a far bigger prize for the flat-tax revolution is to come. Over in Germany, Angela Merkel, the daughter of a Lutheran pastor who, through some quirk of fate, was brought up on the wrong side of the Berlin Wall, is challenging Gerhard Schröder for the chancellorship. Judging by the polls, she is likely to win on September 18: her rating soared after she appointed a slightly eccentric professor called Paul Kirchhof as her economic adviser.

In fact, Merkel is so far ahead that the stock market has leapt, too. Germany, investors believe, is at last on the threshold of economic recovery.

"With her surprise move to name Germany's flat-tax guru, Professor Kirchhof, as her preferred choice for finance minister, Merkel has regained the political initiative and stirred up a healthy debate about tax reform," writes Lorenzo Codogna, Bank of America's European economist, in a note to clients.

"If Germany turned itself into the first major Western country to adopt a flat tax, it would probably become a much more attractive place for business investment in general."

A tough sell? I would say that, if Germany adopts a flat-tax structure, it could actually be tougher to resist it than to advocate it. Admittedly, there could be difficulties. For instance, how would it work alongside national insurance and corporation tax? In all honesty, I do not know. But there is a curious inevitability to the idea, just as Ken Clarke and his friends used to claim there was to the euro. Only, unlike the single currency, the flat tax is a triumph for democracy and keeps winning elections - in Poland, Greece, Russia and elsewhere.

Prof Kirchhof believes he can slim down or scrap more than 90,000 German tax rules and 418 tax exemptions. "Each person only has to pay 25 cents out of each euro earned," he explains. "With the rest, he is set free in the garden of liberty."

As you would expect, none of this appeals to Gordon Brown. He looks more and more like one of the old Soviet leaders who would say Niet to any suggestion that communism was failing, even as the Polish shipyard workers downed tools.

The Chancellor prefers to review his Red Army of tax inspectors and officials, parading past his window. In fact, he has just merged them into a sinister new department called HM Revenue and Customs and moved 1,500 of them into his own building on Whitehall, where he can summon them to his office to hear news of fresh victories.

And in case you think that describing Mr Brown's tax collectors as an army is overdoing it, a report by the Treasury select committee last year said there were 99,400 of them, only a couple of thousand less than the strength of the Army and much more than both the RAF and the Royal Navy.

We know Mr Brown does not like a flat tax because Treasury documents released under the Freedom of Information Act told us officials had dismissed the idea. But then, two weeks ago, this newspaper saw a full version of the Treasury's research, unearthed by the shadow chancellor, George Osborne. This revealed that someone had blacked out nearly all the bits that revealed officials were quite impressed. One of the Browned-out pieces even said there could be an "economic mini-boom" if a flat tax were introduced.

Mr Brown does not like the flat tax because it would see the end of his beloved tax credits. That would be a blessing to the one million people who have been given the wrong amounts and who must now repay the Treasury or face jail. The Child Poverty Action Group is even contemplating taking the Chancellor to court to protect the victims of this fiasco. It goes to show that the poor, as well as the rich, would benefit from a simpler, flatter system, where the savings in the cost of collection could be invested in a much higher personal allowance.

The only senior politician to realise that a flat tax has the potential to be a battering ram that brings Mr Brown's grim edifice crumbling down is Mr Osborne. Shadow chancellors have been two-a-penny in the past eight years, but he is the first to show serious signs of brain activity. He has even had the good sense to rule himself out of the current leadership contest.

It would be the kiss of death to tip a 34-year-old as a future prime minister, so I will spare him that embarrassment. But whoever wins the Tory leadership could do worse than to retain the services of Citizen Osborne."

It's almost like a rejected script from Yes Minister; release a report but blank out all the bits that say flat tax is a good idea.

Matt.

 

shame Merkel didn't win!
Does the concept include the abolition of capital gains tax allowances and Inheritance tax thresholds? Or the allowance of 40% tax relief to the pensions of the rich?

Bob

 

Flat tax works! it isn't a tax cut for the rich because there are no tax exemptions, therefore no chance of tax avoidance.

 

A flat tax of 25% and scrapping VAT and therefore adjusting prices wouldn't be a bad thing!

 

Anyone earning over approx £37K gets 40% tax relief on pension contributions. Don't know about you but I wouldn't call someone on, say £40K particularly rich, especially if they are supporting a partner and children.

Matt.

 

Flat income taxes, if they are revenue neutral, bend the field in favour of the rich, who no longer pay a progressive tax (by definition) and the very poor, who benefit from the basic tax-free allowance there is in any practical system. The middle classes somewhere pay for this if the chancellor is to keep his tax-take. There have been several articles in The Economist, but doubtless the net is flooded too. Also there's the question of business taxes under a flat system. These are involved too.

 

Absolutely Matt.

 

The article highlights the two obvious problems of 1. An initial substantial fall in revenue 2. the tax benefit/loss vs income curve which hits hardest the demographic (in income terms) of people any government would want to please.

In the medium and long term such a change to the UK tax laws should enhance enterprise mindedness and attract an influx of *some* tax exiles

If changes were also made to Business Tax and especially a drop in VAT massive growth could be witnessed in business including an influx of existing overseas business HQ's and investors IMO.

One objective of a UK enterprise focused business tax system (including changes to VAT) might be to try and attract some of the B.V. corporate HQ's (registered in the Netherlands) to the UK.

The short term impact though would hit public finances very hard and would not benefit the incumbant government - ie. they may well fail to be voted in at the next election, so again the 4/5 year term of a UK government has a detrimental effect upon mid to long term strategy as mid to long term planning is anathema if you want to be re-elected.

 

For some balance to the right wing flat tax mania that seems to have taken hold recently, here's and article (quoted below) by Will Hutton on the subject that shows just that whilst it might sound like a clever idea in theory, it's really rather silly in practise.

It's clear that Merkel's flat tax lunacy was a significant factor that turned voters against her. Without that she probably would have won.

Michael.

 

Good balanced stuff Michael.

However, I still think it is right to look into the flat tax option in more detail. It seems particularly bizarre to me that we tax people earning £10K or less per year and then make them claim some of it back via benefits! How much does that lot cost to administer?

I appreciate the big issue is the initial hole in revenue a sudden move to a flat tax system would create. Might there be other ways of temporarily filling that though? Maybe government borrowing to be repaid by the expected increase in revenue income that a flat tax system is supposed to generate going forward? I’m no finance expert I’m afraid but dismissing the idea out of hand hardly leads to progression.

Matt.

 

I would certainly agree with the point that revenue lost due to a flat tax system will not be regained in the UK through greater collecting. Any shift back towards a similar tax revenue would probably mostly come from greater enterprise.

It's important to note the following though:
1. SME business is the largest business sector in the UK
2. Any well advised SME owner will be paying him/herself minimal salary incurring little or no PAYE and minimal NIC, then paying the remainder of their income via dividends, thus paying corporation tax on those *profits*, but up to 9 months after the end of their financial year.
3. A change to flat rate income tax would mean the above strategy would likely change to SME owners paying themselves in declared salary.
4. The net effect would be little or no increase in revenue (probably a small drop) to the treasury, but a shift as to which form of collection returned that revenue.
5. It could be argued though that this is greater collection via PAYE and a more honest situation than we currently experience.
6. SME owners (IME) would be motivated to work harder and grow their businesses which would lead to greater diversity of enterprise and skills and greater employment
5. The above benefits would IMO bring strength and flexibility to the UK economy.

 

There are undoubtedly problems with the existing system and ways in which it could be made more efficient but IMO switching to flat tax is not the solution.

Even if you're convinced of the benefits of flat tax (I'm not) it seems entirely too risky a thing to "try out" on a large and well developed economy like the UK or Germany. If it didn't work it would be an unmitigated catastrophe.

Michael.

 

I would; my dad supported all three kids, a wife, a car and a mortgage on today's equivalant of £18k when he retired in 1989.

 

Well your family must be pretty good at managing their personal finances.

 

That's pretty much exactly what my Dad was earning when he retired in the early 90's. In fairness my Mum brought in a bit extra with a part time job but you still wonder how they did it - I'm one of three kids too. I guess the answer is they did it by not being wasteful and by managing the household budget carefully.

Incidentally though, it's interesting to note that if you revalue that 1989 wage of £18K by the National Average Earnings Index it comes to over £36K in today's terms.

Matt.

 

Unfortunately he shows no such thing. He is also extremely offensive to the bulk of normal working people, presumably for not being fully signed up to socialism.

Paul

 

Why is he offensive? Because you don't agree with him?

 

He wrote,

By 'professional and managerial' he means everybody who pays significant amounts of tax. If there's any dilution of social obligation on the part of the productive it is a direct consequence of the ever greater incursion of the state into social matters. In Hutton's world if the state takes over and then fails that's the tax payers fault. His use of the New Orleans disaster is equally flawed. The ring fencing of a largely black underclass in the US is a product of leftwing social policy not 'tax cuts'.

I don't know if a flat tax is viable, but simpler taxation certainly would be. There are nearly 100000 tax collectors in the UK and the system is broken. IMO public spending is too high a proportion of GDP, but that's a more political issue. 'Flat tax' proposals aren't political in the same sense, politicians of all hues can have a tendency to control freakery and the 'flat tax' contradicts that. I expect you'll see a lot of counter arguments along the lines of Will Hutton with next to no actual reasoning attacking proposals that haven't actually been made.

In an idle moment earlier this year I worked out the actual tax rates between the amount an employer has to find and how much you take home,

The left figure is how your employer pays, the middle how much you take home a year, the right the percentage of the total gone in PAYE and NI.

Code:

  6161.28   5736.6   6.89%
 12929.28   9849.36  23.82%
 19697.28  13869.36  29.59%
 26465.28  17889.36  32.40%
 33233.28  21909.36  34.07%
 40001.28  26356.56  34.11%
 46769.28  29923.92  36.02%
 53537.28  33463.92  37.49%
 67073.28  40543.92  39.55%
 80609.28  47623.92  40.92%
 94145.28  54703.92  41.89%
107681.28  61783.92  42.62%
121217.28  68863.92  43.19%
134753.28  75943.92  43.64%

Paul

 

Your opinions of what Hutton wrote and the reasons for America's black underclass are just that, an opinion. It differs totally from mine. We'll just have to agree to disagree.

If flat tax is not political then why is it mainly championed only by those on the right?

I'm not quite sure I see the relevance of your effective tax rate table. It's interesting, useful even, but doesn't reveal anything that most people don't already know.

Michael.

 

Because those on the left can't stomach any idea that would give any kind of tax break to the well off, even if the overall and eventual effect would be for the whole country to benefit?

Matt.