I still think it is the way to go. Adam Smith blog
Adam Smith Institute & flat tax
By Madsen on Tax & Economy
The flat-rate tax revolution is gathering momentum, Allister Heath tells us in Sunday Business, and quotes Andrei Grecu (ASI author of Flat Tax) that a flat tax "could provide a stimulus to work, produce, invest and save, promoting economic growth and job creation." He also quotes Alvin Rabushka, a life-long advocate of flat tax, "Adopting a flat tax would give the UK a great competitive advantage over its western rivals." This year Rabushka has welcomed Romania and Georgia to the countries using flat tax.
The case is that a single low rate of income (and preferably capital) tax will make tax simpler and fairer. The various bands and exemptions which encourage tax-avoiding behaviour, are replaced a single rate which is low enough to make extra risk and effort more worthwhile. Three things should happen.
1. The rich, those in the top percentiles of income, pay a lower rate and experience a stimulus to extra effort. The poor pay nothing.
2. Within a short time economic growth means that the rich are paying more in taxation despite that lower rate. Although a higher sum, it is a lower proportion of their income.
3. The rich soon pay a higher proportion of tax receipts, even at the lower rate.
Heath confirms that the Thatcher tax cuts, down to a top rate of 40%, led to a surge in receipts, with the top 10%, who had contributed 32% of the tax take before the rate cut, paying 45% of it afterwards. Those (like Charles Kennedy) who argue for a higher tax rate for the rich, are missing the point. It is lower tax rates which can lead to the rich paying more tax, and a larger share of the total.
Given the Ernst and Young Item Club's forecast of spring tax rises to fill a hole of £10b, and tax-hike warnings from the Institute for Fiscal Studies and the Centre for Policy Studies, a study of flat tax in Britain is called for. It is unlikely under a Chancellor whose taste is for complexity, so the ASI's first objective is for a Treasury working party to be appointed by Gordon Brown's successor to study the idea. This will give it official status and prompt public debate by economists and financial analysts. Given this stimulus, momentum to adopt it could build up, and it could make as big an impact as privatization did in the 1980s. |
