Flatter to deceive

9 Sep 05
JACKIE ASHLEY | Forget the Tory leadership race. It might be a gripping human drama, but what the Conservative Party really needs is a Big Idea.

Forget the Tory leadership race. It might be a gripping human drama, but what the Conservative Party really needs is a Big Idea.

For more than a decade it has had a wobbling void where its Big Idea should be. This, however, might be about to change.

The flat tax — a single rate for income tax — doesn’t wear a trilby, crack jokes or pose for the cameras but it might turn out to be more appealing and more important than Kenneth Clarke.

The flat tax is spreading like bindweed across Europe. Many of the former Communist countries of Eastern Europe have adopted it. Russia has it. Greece is interested. The woman likely to become Germany's next chancellor within the fortnight, Angela Merkel, has appointed a flat tax enthusiast as her economic adviser.

And so it comes as little surprise that George Osborne, the shadow chancellor (and one of the few Tories not trying to become leader), is setting up a ‘special commission’ to consider it.

At first sight, the flat tax looks enormously attractive. Everyone pays a single tax rate, whether it be 13%, as in Russia, 16% as in Romania, or even 25% or 30%, as is being discussed in Germany.

The point is, it’s the same rate for everyone: no allowances, no exemptions, no extra tax bands. Filling in a tax return would take ten minutes, not ten days.

Supporters of the flat tax insist it gives a huge boost to the economy. They point to Slovakia, which has a flat tax of 19% and a growth rate of 5.8%. Entrepreneurs are encouraged to make money, they say, secure in the knowledge that they can keep more of it for themselves.

What’s more, a simple system and a low rate mean there’s much less reason for tax evasion and avoidance. The Right-wing Adam Smith Institute estimates that a flat rate in Britain of 22% would so decrease tax evasion that the government would collect just as much revenue as it does now.

Even if there were attempts to avoid the tax, just think how many tax collectors, accountants, tax advisers and financial specialists would be out of a job and ready to take on the task of chasing up evaders.

That, of course, is another of the benefits stressed by supporters of a flat tax: many of the thousands of tax collectors and officials would be made redundant, saving huge sums of public money. So, there would be an economic boom; public spending savings; clarity and ease for the general public; the swift demise of the black economy — and it’s fashionable, too. Why isn’t every political party in every country rushing to adopt the flat tax?

For a start, it’s not at all clear that what works in the emerging economies from the former Soviet Bloc would work in the same way here. Estonia and Latvia had great scope for fast economic growth; so far no major Western economy has tried it. Then there are countless questions as to how it would sit alongside national insurance and VAT.

Above all, the flat tax is not a progressive tax. Admittedly, the threshold at which tax begins to be paid at all can be set relatively high, thus relieving the very poorest of any tax liability. But after that, no account can be taken of individual needs, family circumstances or total income.

Chancellor Gordon Brown’s skilfully targeted, if complicated, system of tax credits would simply be abolished. It would, in essence, be a tax cut for the rich at the expense of the not-so-rich.

The Treasury has publicly poured buckets of cold water on the prospects for a flat tax here, although the Conservatives claim to have seen Treasury research that shows that its officials, at least, were impressed.

Yet if Germany were to go ahead with the flat tax and began to attract huge investment from overseas, the arguments against it would be harder to muster.

The attraction of simplicity should never be underestimated. If the Conservatives were go into the next election promising a single, flat rate of tax, with no fall in revenue for public spending, it would be the first time for many years that the party has put out a clear (and no doubt popular) message.

Up until now, polls show that the British public would prefer to pay more taxes for better public services. The trick for the Conservatives would be to convince people that a flat tax need not mean cuts in public services and that extra revenue would result from an economic boom.

The government should be watching the way the wind is blowing across Europe, and set about organising its defences fast. It is likely to matter far more than whether Ken, David, David, Malcolm or Liam is annointed Top Tory.

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