Grecu, Andrei: Flat Tax – The British Case

Preface The British tax system currently operates through a system of allowances and bands of income. That is, each person is allowed to deduct a personal allowance from total income, which is then taxed at various “progressive” rates ranging from 10 percent to 40 percent. The allowance and tax rate depend on age and status, and the system as a whole has other characteristics that make it unnecessarily opaque, ineffective and administratively expensive. First, there is a separate National Insurance system, although there is little economic rationale for having separate systems. Second, dividends, capital gains, and interest earnings are taxed twice, once at the corporate level and then again at the shareholder or investor level, a situation that discourages investment and saving. Third, the multitude of allowances and tax bands increases the cost of running and auditing the tax system while increasing incentives for taxpayers to find loopholes that minimize their taxable income. A fiscal system with only one tax rate for all levels of income, in which all income is taxed once and only once, might offer an advantageous alternative to the current system. The flat tax has already had remarkable results in countries around the world, such as Hong Kong, the Channel Islands, Estonia, Lithuania, Latvia, Russia, Serbia, Ukraine and Slovakia. Constantly endorsed by economists and politicians in the USA and UK, the flat tax would considerably simplify the tax system, thus saving taxpayers billions in direct and indirect compliance costs. It would give a boost to the economy by considerably improving incentives to work, save, invest and take entrepreneurial risks. The flat tax would also shift billions from investments that help people to avoid taxes, to those that produce goods and services. The recent successful implementation of the flat tax in Eastern European countries has led a number of Western countries, including Germany and Spain, to discuss the flat tax alternative in their parliaments this year. Given the present trend towards fiscal simplification and the rise of the flat tax debate, this study seeks to: 1. offer a brief, comprehensive overview of the flat tax; 2. examine the recent economic performances of countries that have switched to the flat tax system; 3. evaluate the prospects of introducing a flat tax in a developed country such as the UK.