Leading article: The tax that dare not speak its name


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The Independent Online

When George Osborne rises today to deliver the second Autumn Statement of his Chancellorship, he will be addressing a House of Commons, and a country, whose mood is very different not just from a year ago, but from April, when he presented his Budget. There is less hope than there was and more anger, along with a greater appreciation, perhaps, of how far this Government, even more than its recent predecessors, is hostage to forces beyond its control.

Yesterday's OECD forecast, predicting as it did a mild recession for the UK and for the eurozone, follows figures for growth and unemployment which suggest many key indicators are moving the wrong way. Mr Osborne's priority must be to convince his audience that he has remedies for a situation that looks even bleaker than it did when the Coalition took office. It matters little, except for purposes of political point-scoring, whether this is called Plan A (continued) or Plan B.

Whatever it is called, major components are expected to be government backing for more lending to small business – a risk, given the recent history of incautious bank-lending – and new, or accelerated, investment in infrastructure projects. We know this because the Government's media machine has been pumping out selective details, naturally emphasising the benefit and not the cost.

Mr Osborne, though, has a chance to do much more. In his short time in office, he has become known for some clever economics and even more adroit politics. With so little room for manoeuvre, he has nothing to lose by taking a broader and longer view. Why not, in that case, set about root and branch reform of the whole revenue system, based on the principle of the so-called "flat tax"?

In some respects, the Coalition has already moved in that direction. The universal tax credit, to be phased in from 2013, is designed to simplify the interaction of tax and benefits. The raising of the income-tax threshold, as favoured by the Liberal Democrats and adopted in part by Mr Osborne last year, takes many low-earners out of tax altogether. A flat tax, equalising income tax at a single rate and eliminating all loopholes, can be seen as a logical next step.

The most frequently rehearsed objections are two sides of the same coin: the poor, it is said, are penalised, because indirect taxes would rise, and the richest would benefit disproportionately from a lower rate. But these objections take little account of the injustice that exists at present. Under a flat tax, the poorest pay no tax at all. Some indirect taxes might rise to the level of the flat tax on income, but food and basic necessities could remain zero-rated for VAT.

As for the rich getting a better deal, recent revelations about the extent of legal tax avoidance by the wealthy – through trusts, tax-efficient companies, off-shoring and special arrangements with HMRC – show how the current system already makes the rich different. A flat tax would have the advantage of being seen to be fair. There would be no special pleading, no exemptions, no sense in lawyers and accountants devising tax-efficient "vehicles", because the tax itself would be efficient.

If Mr Osborne were still bolder, he could also introduce the sort of global tax liability on Britons that the IRS applies to Americans. Then there really would be fewer places for reluctant tax-payers to hide. But the chief advantage of moving to a flat tax under current circumstances would not be fairness or transparency – though these would be benefits in themselves – but the money released into the economy. There are few better ways to foster that elusive growth than a one-off reform of the tax system that un-squeezes the middle, and leaves people with more money to spend, now and in years to come.