Tax cuts for the poor

Remember Flat Tax? This is the idea, all the rage a couple of years ago, that the tax regime should be simplified to a single, low, flat rate, and that all (or most) allowances and exemptions should be abolished. The main exception would be a generous personal tax allowance (much higher than we currently enjoy in this country).

The idea is that by simplifying the tax system and minimising the tax rate you achieve several desirable objectives: reduced tax rates encourage enterprise and discourage tax evasion; simplification of the system further discourages evasion, and lower tax rates combined with a large personal tax allowance helps those on low incomes by taking them out of the tax system altogether. Countries which have adopted flat-tax strategies have tended to see substantial increases in economic growth, such that there is actually an increase in tax revenue as the benefits of the system kick in, offsetting and then outstripping the short term deficits that introducing the system will incur.

For a while the Conservatives were looking seriously at the flat tax option. George Osborne came back from a trip to Estonia enthused by the possibilities. The Adam Smith Institute showed how with a 22% flat rate of tax and a £12,000 personal allowance economic growth could be boosted, tax revenues could be increased and the poor could be encouraged back into work.

So what went wrong? Mainly the Conservative Party. These days the preoccupations of the Cameron/Osborne Tory Party are such that they want their taxes green, not flat. The suggestion that lower taxes could actually benefit those on low incomes does not chime with the pseudo-centrist position that modern Tories are obliged to adopt. The Tories, like Labour, would rather we go on paying high taxes and oblige lower income families to rely on substandard nationalised public services as a compensation for having access to their own cash.

Nevertheless, in central and eastern Europe, and parts of Asia, the Flat Tax goes from strength to strength. Tom Clougherty of the Adam Smith Institute blog comments:

"A total of 11 Eastern European or former Soviet-bloc countries have now eschewed progressive taxation and have a version of the flat tax, with rates ranging from 27 percent in Lithuania, 12 percent in Macedonia and Georgia. After adopting flat tax systems, these countries have generally experienced increased economic growth, greater tax compliance, and lower unemployment (all of which, by the way, add up to increased tax revenue - despite the low overall rates). The remaining laggards don't want to be left out any longer...

The tax-cutting trend started by Reagan and Thatcher in the 1980s has spread across the world, and the UK is quickly being left behind. Even if a true flat tax is too radical a step, its essence (i.e. a much simpler and fairer tax system) should be driving serious reform. Tax competition is a reality of globalization, and we must embrace it if we are to prosper."

This is an issue which all main parties ought to be addressing. Unfortunately, however, the high tax, big government mindset of our present Prime Minister is shared by both the Tories and the Liberal Democrats. It's time to leave the tired mantras of 20th century socialism behind. Tax reform is an issue for the poor at much as the rich. Social justice demands that those on low incomes are protected from the burden of excessive taxation, and dependence on tax funded welfare (especially the "tax credit" con-trick) and poor quality public services. The flat tax option needs to be reconsidered for the good of all our citizens.