Flat rate tax 'would lift economic growth'

By George Trefgarne, Economics Editor (Filed: 28/03/2005)

If Britain introduced a flat rate of income tax it would initially cost the Treasury around £40billion in lost receipts, but that would be made up by faster economic growth within three to four years, according to the author of research published today.

Richard Teather, the author of A Flat Tax for the UK - a Practical Reality, published by the Adam Smith Institute, bases his calculation on a flat tax rate of 22pc of income, and abolishing all higher and lower rates. Most allowances would also be abolished, to be replaced by a single personal allowance of £12,000.

A flat tax is the current craze among conservative reformers around the world; and the concept has been pioneered in Eastern Europe with successful results. Individuals evading tax are brought into the net as loopholes are closed and this soon generates higher revenues, allowing a much lower rate of tax for each individual taxpayer.

Mr Teather, a tax consultant, said: "Flat taxes help hard-working families by removing great swathes of the population from the tax system altogether. They improve incentives. Flat taxes mean investment decisions can be taken for genuine reasons, rather than at the behest of tax planners. And they are also good for competitiveness. After all, half of higher rate taxpayers are of foreign nationalities."

A personal allowance of £12,000 would remove 10m from the income tax net, said Mr Teather. He also suggests abolishing about £12billion of allowances.

At present nine countries operate a flat tax system and they are soon to be joined by Poland. The Poles have said that they will set their rate at 18pc of income, with a £6,000 personal allowance. Most of the country is expected to benefit, but farmers, who currently pay no income tax, will be the main losers. President Bush has also expressed enthusiasm for the idea in America.

Mr Teather has also published tables showing that if Britain introduced the system he proposes, all income groups would benefit. The poorest third of the population would gain about 9pc of their income in lower taxes.

His calculations take account of tax credits paid to low income groups, but not National Insurance contributions. He said that he is not concerned about the short-term loss of revenue, equivalent to about a third of all income tax revenues.

Mr Teather added: "If you look at the experience of those who have introduced a flat tax, and also the tax reforms of the 1980s which took place in Britain and America, reducing actual tax rates causes revenues to rise."

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16 March 2005: Poland's single tax rate 'is wake-up call for the Chancellor'
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