Tuesday, December 05, 2006

A tide in the affairs of men

Last night Cicero attended a talk given by Steve Forbes, the American publisher and former presidential candidate at the London Junto- a discussion group for financiers, loosely modeled upon Ben Franklin's original Junto.

Ben Franklin famously said "Certainty? In this world nothing is certain but death and taxes.". So it was particularly appropriate that the leading American advocate of flat tax should be speaking to the group.

Cicero has been involved with the Baltic countries since he first discovered the Estonian Legation in London in 1979 and Estonia has been in the vanguard of the flat tax movement in Europe. Following Estonia, Latvia, Lithuania, Romania, Russia, Slovakia, Ukraine, Serbia and Montenegro have all adopted modified flat tax regimes, with new countries joining the list quite regularly.

So far, no Western European state has adopted flat taxes.

A major benefit of a flat tax is that since there are no deductibles, it becomes extremely simple to calculate- thus the expensive tax bureaucracy and the large number of accountants required to help taxpayers fill in the complicated forms are no longer needed. It is therefore a huge saving in collection costs. In Estonia the tax form is a single sheet of A4 that can even be completed online, if you wish.

Perhaps a part of the reason that Western Europe has not adopted the flat system, is that there are several misconceptions about what the results of a flat tax actually are. A single tax rate is seen as being unfair to the poor- since, as a proportion the rich pay the same rate as the less well off. Yet, if the tax free threshold is set high enough even an average tax payer can pay very low levels of income tax- and the system is therefore still progressive.

Indeed, the high rates of taxation under the "progressive" regime, together with a large number of "middle class" tax credits has meant that many of the poorest pay a far higher proportion of income in tax than the middle class, while the rich actually now pay least of all. The wealthy establish a network of off shore structures in order to shelter their assets or income from income or capital gain tax, and since the tax rates can be 40% or 50%, it is economic to spend money to create these complicated and expensive structures.

The policy of Gordon Brown- creating very large tax credit systems- has succeeded to some degree in creating a client relationship for many citizens with the state. The state has increased its power over the citizen by offering tax credit payments. The problem is that the increasing costs of administering these gigantic programmes is creating a fiscal drag- the costs are slowing down our economy.

Steve Forbes spoke very much about American conditions- yet, although the British tax code is not yet as complicated as the US, it is certainly heading in that direction. If we are to avoid the cul-de-sac of an almighty fiscal bureaucracy, we must act quickly to simplify taxation.

Fair, Simple, and cheap to collect should be our watch words- it is time for the British Liberal Democrats to speak up for a tax system that actually delivers these things. The current taxation system does none of these things- Brown's policy (and Cameron's acceptance of it) must be challenged.

As the flat tax tide rises across Europe, it is time for the United Kingdom Liberal Democrats to debate these issues honestly and openly.



Anonymous said...

Flat Rate income tax would also function efficiently in tandem with Land Value Tax.

A flat tax on income would be both simpler and fairer than the present shambles, and would inevitably allow for a reduction of the overall tax burden because of the resultant efficiency savings. It is the best option for financing central government; less bureaucracy, less tax, a smaller state.

Ideally, a much greater percentage of tax would be raised locally, through land value taxation, shifting the tax burden onto unearned wealth as opposed to earned income, and kick-starting local regeneration through non-taxable land improvements.

Cicero said...

Yes- I completely agree with this!!

Anonymous said...

I agree.

I don't understand why so many people (including many in the LibDems, witness the 50p debate) insist in believing that income tax is fair, and that a 'progressive' income tax is a good idea. Perhaps people really don't understand the difference between income and wealth...

I share your unease at the way tax credits change the relationship between state and individual. Its part of the whole welfare system we have, which creates dependency on the state and a belief in the state 'owing you'. Entitlement culture and state dependency seems to be responsible for many problems in society today.