Mary Dejevsky: Why the Left should look at a 'flat tax'

Click to follow

How many tax inspectors does it take to boost the Treasury's coffers by an extra billion? One answer would be around 3,000 – that is the number of people cut from HM Revenue and Customs who could, according to the trade unions, have brought in the additional amount.

But there is another answer. Radically simplify the tax system, and no government would need anything like the thousands of staff currently employed at HMRC, let alone that supposedly missing 3,000. The wage bill, the buildings bill and the expenses bills could all be slashed – leaving every taxpayer better off.

This week saw publication of a comprehensive study of the flat tax – recast as a "single income tax" – as it might work in Britain. Compiled by a group of experts – the 2020 Tax Commission – the report argues that Britons are taxed more than most realise, when income tax, national insurance and marginal benefits rates are all included. Under a single tax system, many would be taken out of tax altogether, as the personal allowance was raised and made partly transferable within households.

Set at a notional 30 per cent levied on all income above that, the tax would be simple and transparent. No income would be exempt. There would be no loopholes and no incentives for particular types of investment or behaviour, but the effect of lower tax generally could spur additional growth of around 6 per cent within 10 years.

So why is such a patent good still regarded as the plaything of mavericks and a small bunch of tax fetishists? One reason is the perception that the flat tax is a creature of the political right, and so bound to penalise the poor. Another is the huge construct of vested interests and the extent to which the political left is wedded to the idea of the big state. It automatically dismisses a flat tax out of hand.

Yet the secret lurking in the economics of the single tax is that, if it penalises anyone, it is likely to be those who have found ingenious ways not to pay tax they should be paying. This would be more difficult under a transparent system. Now that wealthy tax-avoiders are the villains of our age, the single income tax warrants at least a glance from the policy gurus of the left.

If they took a closer look, they might find much more to like, because the most dramatic, and welcome, impact would be on those households felicitously identified by Ed Miliband as the "squeezed middle". The benefit for these families, according to the Commission's calculations, could be more than £3,000 a year.

In opposition, David Cameron outflanked the Labour government by seizing the populist ground on benefits. With low and middle incomes stagnating, and resentment rife against tax-dodging, Miliband could do something similar on family finances and tax. Indeed, the rise in personal allowances and Iain Duncan Smith's moves to integrate tax and benefits mean that the foundations have already been laid.

Simple, transparent and fair, a single tax has at least as much to recommend it for those of modest or average means, as it does for bankers. It offers Mr Miliband an opportunity to reinvent himself as the advocate at once of lower tax, the "squeezed middle" and an effective state. His Labour could be the party of 30 per cent maximum tax; no extortionate marginal rates; no hair-splitting about child benefit; nothing gained from clever accountancy, and no deals over lunch with HMRC. The 2020 Commission's report runs to 400-plus pages. Mr Miliband and his new policy chief, Jon Cruddas, need to get reading.

  • More about:
  • Tax