Flat rate tax is a flat idea

For the record, I am not averse to things that are flat. I am a great fan of the Flat White (it has replaced the Latte as my preferred introduction to the working day), the FlatIron building is pretty cool, and I am one of the few who relish the challenge of flat packed furniture.
However, the idea of a flat tax, as proposed by the 2020 Tax Commission this week, has left me feeling rather, well, flat.

The Commission’s proposal of a flat tax of 30%, and an abolishment of all major taxes does at first glance appear to be attractive. For starters it provides some much needed simplicity to the overly complex tax system we have in the UK. Secondly, no matter which way you look at it, everyone will be better off as there would be a higher personal allowance (a proposed £10,000 tax free amount for everyone compared with the current £8,105) and a flat tax rate of 30% which is lower than the basic rate of tax currently (which is effectively 32%, being 20% income tax and 12% National Insurance Contributions).

To put that into perspective, a low earner household with an income of around £28,000 would receive a tax cut of £3,400 each year. However, an individual earning £150,000 per year would be over £17,000 per year better off. Therefore, as you would expect the higher earners are the ones likely to benefit the most from this proposal.

It is this point that has polarised the media on the subject, however ultimately whilst that is an interesting and worthy debate there is a more fundamental point that needs to be considered: tax cuts lead inevitably to a reduction in cash for funding public spending and national welfare projects – how will this shortfall be addressed?

The Commission’s solution to this problem, in my view, is lacking. Firstly, they propose to introduce local income and sales tax. Such a proposal limits (and potentially removes) the taxpayers’ benefits of the tax cut in the first place, adds a new layer of complexity to the tax system, and puts more control, responsibility and costs on to local councils.

Secondly, they argue that a lower rate of tax would encourage more inward investment into the country leading to a greater overall tax haul. In my view gambling on a tax cut to attract inward investment is, well, a gamble, and I would caution great care against placing too much reliance here.

More likely, in my opinion, is that introducing the flat tax system will inevitably lead to a reduction in Government funded bodies such as the NHS. Ultimately, this will have the most impact on the lower earners – the very people who pound for pound will benefit the least from the tax cuts resulting from the flat rate.

Therefore, if the overall aim of the Commission’s report is ultimately to reduce the country’s deficit, then I believe that a much more effective way forward would be to look at the processes involved in collecting the tax in the first place. According to a report by the Taxpayers Alliance, it cost £1.14 to raise £100 of tax revenue. This compares with £1.16 in 1958. That means that only negligible efficiency savings have been achieved in the last 54 years. Given the advances in technology in that time, this is a startling statistic.

So, rather than focussing on a flat rate of tax, it would be far more beneficial to focus on streamlining the current rules we have, invest in technology so it can be relied upon to automate a number of process accurately, and have a pro-active targeted measure by HMRC to raise further revenues.

What do you think?