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Flat tax is economic nonsense

Will Hutton

A new economic idea has seized U.S. neocons, and now British Conservatives. The trouble is it's batty.

IT IS the new political idea of the season and its sudden prominence is a fascinating commentary on our times. Its endorsement is a badge of virility for every right-of-centre columnist, and now the virus has spread to British politicians. The Opposition Liberal Democrats and Tories (Conservatives) say they will look at it, with the Tory finance spokesman George Osborne announcing last week that he is setting up a new tax commission to assess it.

This catch-all solution for our ills is the flat-rate tax or "flat tax." No more higher tax rates for higher incomes. No more tax credits for the poor or allowances to encourage this or that virtuous activity, such as saving for retirement. Just one straight flat rate for all, rich or poor alike. Simple. Understandable. Easy to collect. The long-awaited magic bullet that will transform the British economy, remoralise our society and revive Conservative fortunes.

Even its most enthusiastic champions recognise that for the first few years the income tax take will fall, but only as the price of transition. There would be such a tidal wave of business start-ups and a burst of creativity unleashed by the new incentive that increased growth would soon restore overall revenues to where they used to be. An economic nirvana would dawn. Millions would be taken out of the tax system altogether. And the millions more who earn just a few thousand above the threshold would be better off, too; they would just pay the flat rate on the balance of their income over the allowance — a trivial amount.

Moreover, this is already happening. Eastern Europe is leading the way with flat-rate taxes; the Russians have followed suit and now even putative German Chancellor Angela Merkel is flirting with the idea.

Where it's been tried, say its advocates, the results are as predicted. Collection rates are up; avoidance is down; economies burst into entrepreneurial life; and the overall tax take ultimately rises. Britain had better wake up and adopt flat tax soon, they say. Gordon Brown, the politician who has irredeemably made the British tax system more complex, with his tax credits, myriad allowances and exemptions is slave to yesterday's thinking. He's toast.

This is an economic idea that has gone from the batty fringe to centre stage faster than any other I can remember. No matter that it is virtually impossible to construct a flat-rate tax without massively squeezing the post-tax incomes of middle-income earners while giving the rich a gratuitously large kickback because the rate has to be set above today's basic rate of tax but below the top rate. No matter that the only way round this problem is to slash public spending, allowing the flat rate to be pitched below today's basic rate while finding resources to at least double the current threshold for paying tax.

No matter that the east Europeans compensate for their flat-rate taxes with hefty social security contributions, and in Hong Kong, another flat tax regime, with big property taxes. Or that the collection problems it might have helped solve in eastern Europe and Russia do not exist in law-abiding Britain. All is ignored in the Gadarene rush to be seen championing an apparently innovative idea.

The constraints that used to make even centrist politicians think twice about advocating a proposal so patently unfair and inequitable are atrophying. The consensus between the parties that rising inequality is essentially an economic and social ill has evaporated. The professional and the managerial classes now live in a universe in which their ever higher income is regarded as an entitlement. No obligation exists to the society of which they are part and, as a result, the infrastructure of social justice and equalisation of opportunity should essentially be paid for by those who might benefit — the poor.

Public endeavour is anathema, and the redistribution of income is therefore morally unjustified. The devil take the hindmost in a rush to feather the rich's own nests.

Grim reminder

But is the Darwinian world of the survival of the fittest that the flat tax betokens really such an economic and social benefit? The bodies floating in flooded New Orleans — 30 deaths in an old people's home alone — are a grim reminder of where the neglect of the public infrastructure in the service of tax cuts ultimately leads, and the necessary interdependencies of modern society that public spending undergirds.

Flat tax is the ultimate goal of the neocons against taxation and interference from the state that has had such success in the U.S. But is America's neglect of its disadvantaged, the decay of its infrastructure and the collapse of its social mobility, along with the emergence of a new aristocracy of its rich, such a social benefit? Is the U.S. being remoralised for the good or the bad?

Equally, the idea that business fortune depends on the minimal state is wrong. Our top 100 companies have all depended on some form of public intervention, regulation or spending to create their franchises at some stage in their lives, notwithstanding the insistence of their overpaid boards that it was all down to individual endeavour.

In historic terms, the economic rise of Europe between 1750 and 1900 was in every country accompanied by rising tax rates to finance the necessary infrastructure; low-tax Mediterranean countries lagged behind their higher tax, trailblazing northern counterparts, and to a degree still do. Penal tax rates or overcomplicated tax codes are economically self-defeating, but that is hardly reason to retreat from the notion of a fair system.

The flat-tax campaign is rather symptomatic of a feeding frenzy of the rich that so far has gone unchallenged by our political class in general and our left-of-centre politicians in particular or, indeed, by society at large.

The silver lining in the cloud is that it forces the issue; on which side of this divide do you stand and why? Mocking flat tax has brought Gerhard Schroeder back from the dead in the German election campaign. In the U.S., New Orleans is a landmark moment for tax-cutters and state-shrinkers.

We may live in conservative times, but flat-tax campaigners have overreached themselves. Economic nonsense will out; society does matter; and the rich do have obligations, a trilogy of truths that at last has a chance of being ventilated. — © Guardian Newspapers Limited 2004

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