Flat tax would be fairer

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Readers may already have seen coverage of The Effects of Taxes and Benefits on Household Income 2007/8, which was published by the Office of National Statistics earlier this week. Allister Heath wrote about it in City AM here, and Charlie Elphicke has done a briefing on it for the CPS here.

The headline-making findings are that the poorest quintile of households pay a greater percentage of their gross income in tax than the richest (38.7% compared with 34.9%), and that their share of the total tax take has risen from 6.8% in 1996/7 to 7% in 2007/8 – despite an allegedly redistributive government being in power during that period. This is mostly down to rising indirect and stealth taxes, which tend to hit the poorest hardest. See the chart below for details:

  Direct taxes Indirect taxes Total taxes
Poorest 10.8% 27.9% 38.7%
2nd 14.1% 18.6% 32.7%
3rd 18.6% 15.9% 34.6%
4th 21.8% 13.7% 35.4%
Richest 24.9% 10% 34.9%

No doubt these figures will lead some to conclude that the tax system needs to be made more progressive, and that the rich need to be stung with punitive higher-rate taxes to make the tax system 'fairer'. However, this would be completely the wrong approach. We already have a 'progressive' tax system, and yet it appears to achieve the opposite of what is intended. By contrast, replacing our current income tax, employees' national insurance contributions and council tax with a flat tax and a high personal allowance would make things much fairer. The figures below assume a tax-free personal allowance of £12,000, with all income above that taxed at 30%:

  Direct taxes Indirect taxes Total taxes
Poorest 0% 27.9% 27.9%
2nd 0.01% 18.6% 18.6%
3rd 15% 15.9% 30.9%
4th 20.7% 13.7% 34.4%
Richest 25% 10% 35%

Now, I'm not saying that this is the ideal allowance/tax rate – I'm using simply using £12,000 and 30% to illustrate that a flat tax could leave the richest quintile paying the same percentage of their total income in tax, while greatly reducing the burden on lower-earners. Plainly, the UK's indirect tax burden would still leave the poorest quintile paying more tax than they should, but this would largely be addressed by existing cash benefits. 

As it happens, the ONS statistics say some interesting things about benefits too, but that's a story for another day. You can download the complete set of ONS figures and tables here.