Andrew Grice: The Week in Politics

Gimmicky flat-tax talk won't help the Tories - they still need to be trusted
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The Independent Online

True, a flat-tax revolution is sweeping Eastern Europe. Greece and Germany are also eyeing up the idea and Britain can't ignore what its competitors do. But it is dreamland to suggest that a pure flat tax could be implemented here and the two opposition parties know it.

Supporters of a flat tax reject the obvious criticism that it would hit the poor hardest. On Wednesday, George Osborne, the shadow Chancellor, argued that a flat tax could be "very progressive" if coupled with a generous rise in personal tax allowances to take the lowest paid out of tax completely.

If only it were that simple. Sensible Tories admit it isn't. David Willetts, a likely kingmaker in the Tory leadership contest, said recently that raising personal allowances to £10,000 would cost £30bn. Yet only £2bn of that would remove low earners from the tax net; the rest would go to people higher up the income scale because everyone would benefit. Hardly very fair.

A flat tax might help those at the bottom and the top, but people on middle incomes would lose most, and they are a vital group for the Tories to woo. A study for The Economist, based on a 30 per cent flat tax and a £10,000 personal allowance, found that a third of all taxpayers would lose out.

Such calculations explain why Gordon Brown is not losing much sleep over a flat tax. He says the Tories are digging their own graves by flirting with a scheme that would create many losers. Indeed, Mr Osborne may be repeating the mistakes of a previous shadow Chancellor - Labour's John Smith, whose 1992 "shadow Budget" raised child benefit and pensions, yet turned out to be a vote-loser because of the tax rises that required.

The poll tax was, in many ways, pretty close to a flat local tax. And it created too many losers and, if there is a law about tax changes, it is that losers howl and winners give no thanks. Similarly, Labour might not have got much political credit for Mr Brown's flagship tax credits, but the Tories refused to scrap them at this year's election.

Flat tax supporters argue it would create a virtuous circle, with any such gap being filled by economic growth. The Treasury insists the boost would a one-off, leaving a big shortfall in future years.

Mr Brown would portray a flat tax as a Trojan horse for massive spending cuts, contrasting that with Labour "investment" in public services.

To be fair, the Liberal Democrats acknowledge the idea's limitations. They will discuss it at their annual conference starting a week tomorrow. But Vince Cable, their Treasury spokesman, told me they were likely to opt for a "flatter", simplified system rather than a "pure" flat tax. "It is conceptually quite attractive but there is a big revenue loss," he said. "If you push up the rate, that is bad for people on middle incomes. That is the dilemma." The Tories will probably reach the same conclusion.

At least the idea has sparked a debate on tax, which will keep Mr Brown on his toes as he tries to avoid further tax rises before the election. I wouldn't rule out him trumping the other parties with a tax simplification of his own.

To his credit, Mr Osborne produced a scathing analysis of how the Tories' tax cuts "gimmicks" failed at recent elections. But opting for a flat tax would serve the Tories no better if voters still don't believe they would safeguard services.

People may be tiring of Labour's backdoor tax rises. But they still prefer spending on schools and hospitals to tax cuts. Winning trust on services should be the Tories' top priority, not finding a new tax gimmick. Only then will they be able to take on Labour on a level playing field.