Time for flat tax

The latest publication from The Adam Smith Institute, the UK's leading innovator of free-market policies, is Andrei Grecu's report of flat tax. Tried in 9 countries so far, it has achieved impressive results. It involves setting a single rate of income tax and doing away with all of the allowances and exemptions. The threshold is set high enough so that low earners pay no income tax at all, and everyone else pays a fixed rate.

Because the flat tax is paid on all income above that threshold, the rate can be very low. It ranges between 13% and 33%. The low rate encourages payment. There are no tax loopholes, nor the need for them, given the low rate. Instead of paying accountants to shelter income and move it offshore, people find it cheaper just to pay the tax. And a low rate makes it more worthwhile to earn more, which brings economic expansion.

The countries doing this have found the low flat rate produces more tax revenue than the complex system which went before. When tax rates are cut the richest people end up paying a higher share of the total. The top ten percent stop avoiding and evading taxes and put their effort into earning more instead. The result is that they pay a higher proportion of the total. And economic expansion produces higher revenue from the lower rate.

Hong Kong brought in a flat tax in 1947. Other flat tax adherents include Estonia, Latvia, Lithuania, and Slovakia, all EU members. They also include Russia, one of the G8 countries. Even the US is interested, with some of the Bush team looking at the possibility of a flat tax during his second term.

In Britain the flat rate might be about 20%. Estonia, which brought in a 26% flat rate a decade ago, is lowering it to 20%. At 20% few people would object to paying the tax, so out would go the exemptions and allowances, and in would come an economic boom. Out, too, would go a legion of tax inspectors; flat tax is simpler and very much less costly to collect.

A flat tax is simple, letting people understand their obligations. It is fairer, with low earners paying nothing and the rich paying their due. And it unleashes all the talent and enterprise being held back by a devious and complex system.

(Text mirrored from www.AdamSmith.org)