current affairs

Keeping it simple – for tax

I’ve often had conversations, inspired partly through the Green Party’s citizens’ income policy [PDF], that governments would be better off with simple one-rate benefits payments and one-rate tax levels. Gordon Brown has been much criticised for all the various credits he offers on the basis that they’re so had to actually apply for few needy citizens really benefit. Complexity is the enemy of having a cheap government, helping citizens understand where their money goes and it is also the enemy of preventing fraud. Every wrinkle or exception in the tax-law is potential loophole to be exploited.

So I read the following with great interest in What’s Next (which I can highly recommend):

Flat tax idea

In 1994 Estonia became the first country in the world to adopt what is known as a flat tax system. This is essentially a system where there is just one rate of tax – in Estonia’s case, 26% for all individuals and companies. There is no schedule of rates and no exceptions. The idea proved so successful that seven other countries in Eastern Europe have introduced the idea and an eighth (Poland) is considering it. Critics who said that that the idea was unworkable have moved on to another objection, namely that it is unfair because it is not progressive (ie, everyone pays the same). However, while the amount is fixed there is nothing stopping countries applying a threshold (ie, exemption amount). The advantage of a flat tax system is its simplicity. Everyone knows how the system operates and administration and compliance costs are minimised. In the US the cost of running and regulating the tax system is estimated at between 10% and 20% of total revenue collected. That’s a sum equivalent to 25% to 50% of the US budget deficit.

Ref: The Economist (UK) 16 April 2005, ‘The flat tax revolution’.

Those final figures should be enough for even George W to take notice.