The Australians are looking at a simpler system that would not only boost growth but increase revenue
Coyly, fitfully, Australia is inching towards a flat tax. Last week, its government published a budget that will put 94 per cent of Australian workers in the same income tax bracket. All right, it’s not completely flat: the new rate of 32.5 per cent will apply to earnings between $41,000 (£23,000) and $200,000 (£111,000). And it won’t be fully in place until 2024. Still, Australia is the first wealthy Western country even to aspire to a single rate. Hitherto, flat taxes have generally been implemented on small islands and in former Soviet territories.
Why haven’t they caught on more widely? After all, we have enough evidence to know that, other things being equal, evening out tax rates boosts growth and thus increases government revenue. Opponents like to claim, as they are currently doing in Australia, that flat taxes are regressive, because the rich pay less and the poor pay more. But that isn’t true. A flat tax, properly implemented, means that the rich pay less and the poor pay less.
How can such a thing be? What sorcery allows a government to cut everyone’s taxes without suffering a commensurate fall in revenue? Well, the point critics tend to miss is that the complexity of a tax system is every bit as damaging to growth as the fiscal burden.
Britain, like most developed countries, has an extraordinarily convoluted system. Each new government has its pet schemes, its favoured groups. Every lobby wants some special status. In consequence, our tax system is shot through with exemptions and tapers and deferrals and allowances.
I don’t believe a single person can have read and understood all the rules. Tolley’s, the quasi-official tax guide, was a daunting 2,529 pages long when Gordon Brown became Chancellor in 1997. Today, it stands at more than 20,000 pages.
Even the smallest employers need to hire accountants, thus diverting money that could have gone into their businesses – and, more to the point, diverting time and energy.
The people who can afford the most ingenious accountants are, of course, the rich. Their accountants are better paid than the Treasury’s, and know how to exploit the loopholes in those 20,000 pages.
One way to think of our tax system is as a massive Swiss cheese. Each hole represents a perk created by a previous chancellor in pursuit of a headline. Compress the cheese by collapsing those holes and its height will fall. In other words, flatten and simplify the system and you can reduce the overall rate.
Now here’s the bit that often surprises people. As the rate falls, the rich end up paying more, both as an absolute sum and as a proportion of the total tax take. Why? Because it is no longer worth their while to pay high upfront fees to accountants, or set up offshore trusts, or move their domicile overseas.
The tax guide, was a daunting 2,529 pages in 1997. Today, it stands at more than 20,000 pages
It’s the same story every time. Between 1980 and 2007, the US cut taxes at all income levels. Result? The top one per cent went from paying 19.5 per cent of all taxes to 40 per cent. In Britain, when the top rate of income tax was lowered from 83 to 40 per cent between 1979 and 2010, the share of income tax collected from the wealthiest percentile rose from 11 to 27 per cent.
Ah, say Lefties, but they’re paying more tax because they’re earning more. Well, yes. And your problem with that is…? We should surely be encouraging wealthy people to earn, spend, pay taxes and run businesses here. I don’t know about you, but I have yet to work for a poor boss.
Suppose that we could, in the old class war slogan “eat the rich”. Imagine that the top one per cent simply disappeared, like White Russians fleeing the Bolsheviks. What would that do to our budget? All of a sudden, there would be a 27 per cent deficit. The rest of us would end up picking up the tab for all the departed plutocrats. It’s true that our society would be more equal: the departure of the top one per cent would leave everyone else more closely bunched. But we would also see an absolute fall in our income as the result of disinvestment and job losses.
The problem with flat taxes is not economic but political. The idea that lower tax rates can lead to higher tax revenues is counterintuitive.
People tend to start with an assumption and then fit the facts to their prejudice. If you start from the assumption that lower taxes must mean lower revenues, then a candidate who argues the opposite, however sound his logic, may strike you as a shill for oligarchs. Or you might be tempted to back wealth taxes on grounds of envy or egalitarianism, even at the cost of general prosperity. A YouGov poll in 2015 showed that a majority of Labour voters would back a top rate tax even if they thought that it meant less money for the Treasury.
This lingering resentfulness makes it difficult for democratic governments to go all the way.
It explains why Australia will leave in place a top tax rate, just as Nigel Lawson did. Even so, any move to a more level set of rates will, over time, enrich the whole country.
What is it they say in Australia by way of congratulations? Half your luck, you blokes.