Flat tax- (19.12.04)

Christmas is traditionally a time for chestnuts and this years economic old chestnut appears to be flat taxes. I call it an old chestnut is that this is hardly a new idea, all income taxes tend to start off as flat taxes with a single rate applying to all consumers at all levels of income. The attraction of the idea is simplicity, taxes are more effective is there is certainty over payment and less ability to claim allowances and reliefs. It is true that complications in a taxation code can create perverse incentives, which are usually the reasons why the complications are introduced to begin with.

There are variations on a theme. The US Alternative Minimum Tax was originally designed to prevent widescale tax avoidance. It contains a certain level of tax free income on all income with a two close rates above this level. The idea of having one type of tax on total income is seen as more progressive than having a bundle of taxes on property, inheritence, capital gains and so on.

There are two main ideological reasons why flat taxes should not be preferred. The first is that the tax itself implies that governments should not be dictating to consumers through the tax system. This implies that redistribution through tax and benefits is in itself a bad thing and should be avoided. The second is that the negative social consequences of this are considered to be outweighed by economic simplicity. Tax simplicity if it is to succeed as a concept needs to overcome these disadvantages.

One example is the pensioner savings credit in the UK. This is a complicated tax and income gaurantee that is difficult for any individual to calculate the effect on them. It requires pages of forms to claim. However, it was designed to ensure that the benefits of saving were not disadvantaged by targeting a minimum income at pensioners through means testing. It is precisely this aim that is used in arguing against the pensioner credit by those on the right, who support flat taxes, and those on the left who ideologically oppose them.