Expert View: A flat tax solution to Brown's Budget 'irrelevance'

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The Independent Online

Gordon Brown's next Budget may well be his last. Even if it isn't, it is unlikely to be either radical or long term. As someone who spent too many late nights writing post-Budget reports, I welcome its increasing "irrelevance" for financial markets. But I can't help wishing for a radical Budget in a new parliament.

Gordon Brown's next Budget may well be his last. Even if it isn't, it is unlikely to be either radical or long term. As someone who spent too many late nights writing post-Budget reports, I welcome its increasing "irrelevance" for financial markets. But I can't help wishing for a radical Budget in a new parliament.

Why? Well it seems to me that the public-private partnership idea has failed, largely because the public sector hasn't really understood the role of incentives in the private sector. As a believer in free markets, I think we need a different approach.

If you pay people to meet set targets, they will hit them regardless of what else you want. If you let police keep revenue from speed cameras and wardens keep some of the parking fines, you will get more speeding tickets and more parking fines. Similarly, if you fiddle with the tax structure (as Mr Brown has) to encourage people to do one thing, then you need to fiddle even more when they end up doing something else (or, indeed, not doing something else). This way lies central planning. And we know how effective that is.

So how does this fit into a radical Budget? Ideally I would set the tax structure to raise revenue for necessary public services, rather than use it as an instrument of income redistribution. The ultimate expression of this is a flat tax - an idea being raised again in the US and, most interestingly, already adopted by many of the former Communist bloc, which have seen the wonders of central planning. But I'm not being that radical (so don't send all those angry emails just yet). I would like to suggest that the state and its agents using the existing price structure to align revenues and incentives. In particular, we can use the existing VAT system.

If we lifted the rate of VAT to 20 per cent then, on current expenditures, we would raise around £10bn. The extra 2.5 per cent could be given to the local authority where the income was spent, providing an incentive to care about how much money local businesses are actually making, rather than seeing them as a captive cash cow. Extending VAT at 5 per cent to water and sewage and passing that on could provide a further healthy source of income and would be very easy to collect.The extra VAT on fuel could go to the transport budget (all those calling for windfall taxes on oil companies should remember that the Exchequer already gets 80 per cent). We could put VAT on car insurance and scrap car tax, requiring, as the French do, an insurance sticker in the windscreen.

The immediate reaction would no doubt be that this penalises those on low incomes, but no more than inflation already does - and far less than the current inflation in the forced consumption of services from state monopolies. If we raise the existing national insurance contribution to 15 per cent (with a cap), so that everyone contributes to a basic safety net, we should have enough in the pot to take everyone earning less than £10,000 a year out of the income tax net completely; the Inland Revenue says that the bottom 50 per cent of taxpayers pay only 11 per cent of taxes. This would also involve taking away the array of targeted benefits at the same time, but would greatly simplify the whole central planning system.

Politicians wouldn't like this of course, as it would reduce the state dependency of the population and mean resources were allocated according to market signals rather than the wisdom of politicians and bureaucrats (political expediency and lobby groups). Which is why I think it's a good idea.

Mark Tinker is a director of Execution Stockbrokers. Mark.Tinker@execution-limited.com

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