At the moment a lot of stupid things are being said about flat taxes by a lot of people who should know better. This includes people saying that changing from our current system to a flat tax system would reduce tax avoidance, and that it would result in the rich paying more whilst the poor pay the same amount. At best this is wildly untrue, at worst it is deliberately misleading.
Whilst it is true that the current tax system is complex and that we have a progressive income tax, it’s not true that if we had a flat income tax our current system would become much simpler.
Tax avoidance does not take place because income higher up the income distribution gets taxed at higher rates than income further down. Tax avoidance takes place because (amongst other reasons) different sources and types of income are taxed at different rates. A flat tax on income from work that was higher than income from other sources (like capital gains tax which ranges from 10-28%) would have a similar effect on tax avoidance as a progressive income tax.
Tackling tax complexity is important, as we’ve argued before on this blog, a simpler tax system could help reduce inequality as it reduces the advantages big companies get from hiring accountants to find tax loopholes. But a progressive tax system isn’t a complicated tax system. This isn’t a particularly controversial statement, the IFS has said this before. Tackling complexity in the tax system is important, but it has nothing to do with a flat tax. Nor is there a contradiction between wanting a progressive tax system and wanting a simpler tax system. Flat taxes don’t increase the amount the rich pay by reducing complexity and increasing tax compliance and they also don’t increase the amount the rich pay by persuading them to work harder. As we’ve shown in our recent report on top tax rates, evidence suggests that the very rich don’t work more if their taxes are cut, and tax cuts don’t increase growth.
Proponents of a flat tax also miss a basic fact about our tax system, it’s already quite flat. As we have shown in our other recent report Unfair and Unclear, the average household pays a similar proportion of their income in tax as a household in the top 10%.
The progressive nature of income tax balances out other taxes, like council tax, which is deliberately regressive in its design. People are proposing a flat tax to replace income tax, which represents the majority of tax that the richest pays. Strangely they’re not calling for a flat council tax, which a family on the minimum wage will spend more on than they will on income tax. Nor are these proposals for a flat tax addressing the highest marginal tax rates. A “flat tax” of 31% on income for people having their tax credits withdrawn would be a great improvement over 70%+ rates seen even under the government’s more ambitious reforms. But neither of these things are what is being proposed at the moment, which is essentially a massive tax cut for the super-rich.
Tim Stacey, Policy and Campaigns Officer.