Magazine article The Spectator

Less Means More

Magazine article The Spectator

Less Means More

Article excerpt

Although taxes, like death, may be inevitable, a complicated tax system is not. So why is Britain content to tolerate one?

Fiscal complication arises for different reasons in different countries. But the driving force everywhere is government's desire to raise as much revenue as possible with the least possible resistance. In Britain, the present government has managed to create a jungle of taxes at different rates, levied at differing thresholds, amid an impenetrable thicket of allowances and credits. Meanwhile, the shadow Chancellor Oliver Letwin's own proposals for simplification are even more modest than his plans for reducing public expenditure. Mr Letwin has, for example, dismissed the project of a flat tax as 'nirvana'. This is a mistake.

A flat tax aims at simplicity, transparency and equity. Within limits, it is possible to pick and mix features according to political necessity. But there are three essential aspects of flat tax: a single rate is levied on all individual and business incomes; tax allowances and exemptions are removed; and unfair multiple taxation of savings is ended.

The idea of a flat-rate tax was born in America. But it never grew to maturity there. The most powerful advocate of the project today is Art Laffer, of 'Laffer Curve' fame. Mr Laffer is now pressing the new California governor, Arnold Schwarzenegger, to introduce a flat tax as a way of overcoming his state's financial crisis. But although flat taxes have been applied successfully in several US states, they will probably never be so by the federal government. This is because Congress cannot resist tacking on to tax-reform measures a host of provisions to buy off special interests. The Land of the Free is also the land of the pork barrel.

The lands of the newly free are, by contrast, keen to give full expression to the flat-tax philosophy. In all the ex-communist countries, getting people to pay their taxes is an enormous problem. The populations of these states developed the techniques of evasion to a fine art - none more so than the Russians. Accordingly, President Putin in 2001 introduced a flat tax on personal income of 13 per cent, in place of a previous three-bracket system with a top rate of 30 per cent. It worked. In the first year alone, revenue increased by 28 per cent after adjustment for inflation. The Russian economy has also enjoyed a surge of growth.

Russia was not, though, the first to implement such reform. Flat taxes had already been introduced in Estonia and in Latvia. These and other EU candidate countries saw the simplification and reduction of income and business taxes as crucial to their exploitation of the European market. Indeed, of the ten EU candidates, five now have flat-tax systems and the other five are moving in the same direction. The most recent convert is Slovakia, which last year implemented a flat tax of 19 per cent. Significantly, Samsung, the semi-conductor giant, has since announced that it will make Slovakia the centre of its operations and has cut 800 jobs in Britain and Spain as a result.

By contrast, Western Europe remains wedded to high and complex taxes. Recent French and German tax cuts are extremely modest, but at least testify to a dawning realisation of the dangers. Yet Britain, which continues to live off the legacy of the economic reforms of the 1980s, remains deeply complacent about its marginal tax rates. …

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