Time to look again at a flat tax in the UK
The ASI published ‘Flat Tax - the British Case’ by Andrei Grecu in 2004. It aroused much debate at the time and now, with the prospect of a radical incoming government, it is perhaps time the case was made again.
A flat tax is a system under which all individuals and businesses pay the same percentage of their income in tax, regardless of how much they earn. The three Baltic states have flat tax systems, and there’s a strong case for implementing a flat tax in the UK.
The UK tax code is 10 million words and 21,000 pages. To put that number in some kind of perspective, the Complete Works of Shakespeare is about 880,000 words. This makes the UK tax code about 12 times the length of the Complete Works of Shakespeare.
A flat tax system drastically simplifies the UK’s current complex tax code, which includes multiple bands, thresholds, and reliefs. It makes compliance easier for individuals and businesses, reducing the need for costly tax advice and administrative overheads. Tax returns would become more straightforward, increasing transparency and reducing errors.
A flat tax could remove many disincentives to work, save, or invest that arise from higher marginal tax rates. Lower, more predictable rates would encourage entrepreneurship and increase productive economic activity. It reduces distortions in economic behavior, as people and businesses no longer need to restructure income to minimize tax liability.
A single low rate reduces the incentive to evade or avoid taxes. It is easier to enforce because of its simplicity, and fewer loopholes mean fewer opportunities for manipulation.
If set at the right level, perhaps 20%, a flat tax can be revenue-neutral, maintaining government funding while encouraging higher long-term economic growth. The increase in taxable income and reduced avoidance would broaden the tax base over time.
All taxpayers are treated equally under a flat tax because everyone pays the same proportion of their income. This equal treatment can strengthen public trust in the tax system and its perceived fairness.
A flat tax rate of 20% is a reasonable starting point, based on several factors. It is close to the current basic rate (20%). This would minimize disruption for most earners. It is lower than the higher and additional rates (40% and 45%) and would attract higher earners to declare more income and reduce tax flight.
It could maintain revenue balance if combined with a reasonable personal allowance (e.g. £12,570), and it could preserve progressivity and maintain revenues.
Its impact on the different earning brackets would be as follows: For low incomes (< £12,570) no tax is paid under either system owing to the personal allowance.
For middle incomes (£20,000–£50,000) the flat tax yields similar or slightly lower taxes than the current system. But it is simpler, with a consistent 20% rate applied after the allowance.
For higher incomes (£50,000–£200,000) taxpayers benefit from significantly lower tax bills under the flat tax compared to the current marginal rates of 40% and 45%.
For example, at £150,000 income under the current system ~£50,460 tax, but under flat tax £27,486 tax, a saving of ~£22,974.
This data shows how a 20% flat tax with a standard personal allowance could reduce tax burdens across all income levels, particularly for higher earners, while simplifying the overall structure. It is decidedly a bid for both simplicity and growth.
Madsen Pirie