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Mary Dejevsky: Why the political left should adopt the 'flat tax'

Ed Miliband could become the advocate of low tax, the 'squeezed middle' and an effective state

Mary Dejevsky
Thursday 24 May 2012 19:59 BST

How many tax inspectors does it take to boost the Treasury's coffers by an extra billion? Combining yesterday's report by the Commons Public Accounts Committee and claims by trade unions, one answer would be around 3,000 – that is the number of jobs lost from HM Revenue and Customs that could, theoretically, have brought in the additional amount.

But there is another answer, and that figure plunges deep into minus territory. Radically simplify the tax system, and no government would need anything like the 26,000 staff currently employed at HMRC on compliance, let alone that supposedly missing 3,000. The wage bill, the buildings bill and the expenses bills could all be slashed – leaving every single taxpayer better off. So why is there no serious constituency for reforming the system along the lines of the fabled flat tax – for this is what it would essentially be?

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, calling themselves the 2020 Tax Commission, the report argues that Britons are taxed far more heavily than most realise, when income tax, national insurance and marginal benefits rates are all taken into account. Under a single tax system, many would be taken out of tax altogether, as the personal allowance was raised beyond the £10,000 envisaged now, and made partially 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 on earth, the question bears repetition, is such a patent good still regarded as the plaything of mavericks and a small bunch of tax fetishists? One reason has to be the widespread perception that the flat tax is a creature of the political right, and so likely – indeed bound – to favour the rich and penalise the poor. This prejudice is only reinforced by the fact that the most committed proponents of the flat tax are to be found on the right, albeit its libertarian wing.

Another is the huge construct of vested interests and the reality that a single tax presupposes changes that would go far beyond major demolition at the tax inspectorate. So long as the political left regards a big state as inherently better than a small state, regardless of how well it does the job, it will dismiss a flat tax out of hand.

Yet the secret that lurks 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 the tax they should be paying. Whether you call it avoidance or evasion, either would be more difficult under a transparent system. And with the single rate lower than the present higher rates, the incentives for avoidance would decline. 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 could be coaxed to take a closer look, they might find a lot more to like, for the most dramatic, and welcome, impact would be on those identified by Labour as the "squeezed middle". The combination of a higher tax allowance, the single tax rate, and the possibility for an individual to transfer some income to a non-working partner and children for tax purposes, would leave everyone with more of their own money. The benefit for the "squeezed middle" could be more than £3,000 a year.

Nor should the shrinking of the state be approached with too much apprehension – except by its supernumerary employees. Escalating rows between Coalition ministers and senior civil servants stem largely from the awkward coexistence of deregulated agencies and an old-style civil service, still operating to almost full strength. This duplication of functions is untenable.

In opposition, David Cameron outflanked the Labour government by seizing the populist ground on state benefits. With low and middle incomes stagnating, and resentment rife against tax-dodging, Ed Miliband could do something similar on household 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 and big business. It offers Mr Miliband an opportunity to reinvent himself as the advocate at once of lower tax, the "squeezed middle" and an effective state, which he could propose to slim down not on US, but on Australian or Swedish lines. His Labour could be the party of 30 per cent maximum taxation; no extortionate marginal rates; no hair-splitting about child benefit; no advantages to be derived from clever accountancy, and no special deals over lunch with HMRC. The 2020 Commission's report runs to 400-plus pages. Mr Miliband and his new policy chief, Jon Cruddas, should get reading.

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