Expert View: Flat-taxers make a point that's lost on New Orleans

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The Independent Online

And yet, I believe we have still failed to recognise the full implications. The sight of the world's richest nation struggling to maintain food and water supplies, let alone law and order, has shocked perceptions. Put bluntly, the corpses on the water-logged streets of New Orleans are ample testament that George Bush's "small government" agenda has gone too far.

It felt bizarre to listen on Wednesday to the shadow Chancellor, George Osborne, choose this of all times to ape Mr Bush and throw a grenade at taxes and government spending. Austrian right-wing extremist Jörg Haider did the same the next day.

Mr Osborne attacked the big shift in the UK's tax and spending plans which has seen the Government's share of GDP rise from 37 per cent (in 1999) to 42 per cent - the biggest shift in Europe. He also rightly ridiculed the current Chancellor's obsession with tax-tinkering, and the ludicrously complex system we endure. On this, his timing was good, as last week a damning report was published by the Public Accounts Committee on Gordon Brown's tax credit system, described as a "nightmare".

The solution, according to Mr Osborne, is to opt for the kind of tax overhaul that is sweeping through Eastern Europe. A flat-rate tax (say 30 per cent) is levied on everyone, combined with the abolition of tax loopholes.

The regressive nature of this can be offset by a generous increase in the tax threshold (the Adam Smith Institute suggests to £12,000).

The effect is a reduction in government revenue, which flat-taxers argue is offset by a boost to economic activity and entrepreneurialism, which brings higher revenues in its wake.

The Eastern European experience gives support. Estonia introduced this system with a flat tax of 26 per cent. As the economy and revenues boomed, it has quickly been followed by Georgia, Ukraine, Romania, Slovakia and even Russia, where shocked tax officials saw revenues rise by 25 per cent.

But the economic situation of "emerging Europe" is somewhat unique, which is why it might be more useful to consider the US. While Mr Bush has not embraced a full flat tax, he has adopted a variation, flattening the progressive structure of income tax and introducing a massive cut in tax on dividends and capital gains (both now 15 per cent).

Supporters say the market has not yet woken up to the consequent recovery that has been going on in US tax revenues. Some predict the US deficit will shrink from 3.6 to 2.7 per cent this year thanks to federal revenues being $85bn above predictions.

But whatever the trumpeted self-financing aspects of these radical tax reforms, public expenditure has still had to be cut. New Orleans showed the potentially extreme results.

Mr Osborne is right to seek a simpler and more enterprising system - particularly at a time when our biggest competitor in Europe, Germany, is doing the same thanks to Angela Merkel. But the US experience would seem to demonstrate that the trade-off between entrepreneurialism, simplicity and social obligations inevitably leads to a compromise that tests public tolerance. The German elections may demonstrate that the German people have had enough of one extreme, the events of New Orleans that Americans have reached the limits of the other.

christopher.walker@tiscali.co.uk

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