Flat Taxes and Welfare Provision

The Daily Telegraph reports today ("Treasury blocks move to flat rate inflation") that the Treasury has blacked out several arguments in favour of introducing a "Flat Tax" (a single rate of tax across all income levels) in a report on the subject ("HM Treasury Freedom of Information Disclosure - Flat Taxes"). This is of course revealing of Gordon Brown's attitude to simplification of the tax regime (of which the Working Families tax credit fiasco is another good example). But the equation assumed by right-wing proponents of a Flat Tax (such as the Telegraph or George Osborne), namely that Flat Tax is synonymous with low tax, is equally revealing of their interest in the matter.

The debate is often portrayed as being between two options:

  • tax and spend redistributionists like Gordon Brown, who want to retain a complex system of differential rates and rebates in the name of social fairness, and
  • free-market conservatives like George Osborne, who want low (possibly flat) tax rates in the name of economic competitiveness.

It is a pity that only the two extremes are considered. There is a third option, which combines the simplicity of a flat tax with the social benefits of differential rates. It requires the introduction of a Universal Benefit along with the Flat Tax.

A Universal Benefit is a flat-rate payment made to every person in the country regardless of income or circumstance. It would act as a (possibly partial, preferably total) replacement for Welfare Payments and State Pensions. It would make irrelevant the issue of age of retirement. It would eliminate most means-testing. It would reduce opportunities for benefit fraud. It would remove most poverty traps. It would ensure that no one had to accept unreasonable terms of employment without discouraging the creation of jobs, as the Minimum Wage does. If younger people were included, it could contribute to child support and provide an alternative basis for education funding. It could allay (often spurious) concerns about immigrants abusing the welfare system.

In combination with a Universal Benefit, a Flat Tax could be set at rates that were closer to what citizens of a mature democracy with strong social provision and egalitarian tendencies expected, and government financing of such a society required.

It is neither a left- nor a right-wing policy. A Universal Benefit at £7,000 p.a. and Flat Tax at 50% would be strongly redistributive. A Universal Benefit at £3,500 p.a. and Flat Tax at 25% would encourage personal responsibility. As a moderate nation, most of us would want to see the bar set somewhere in the middle, at a level that was low enough to discourage scroungers from living off the state, but high enough to provide a genuine safety net.

It is not the least of its advantages, that under such a system, it would be more difficult for political parties to disguise their economic and social agenda.