G8: Could the Solution to Growth be Simpler Taxes?

There has been much talk of the need for growth at the G8 meeting. Could it be that the solution is really quite simple? A recent 400-page report from economists and company directors called for a move from what it described as Britain’s “extraordinarily complex and punitive” tax system to be replaced with a simple 30% flat rate of income tax with a £10,000 personal allowance.  The 2020 Tax commission said the single income tax would allow workers to keep thousands of pounds to spend on the high street. The Chairman of the commission Allister Heath said “a single, much more reasonable” tax could transform economic prospects. They are urging the UK finance minister George Osborne to take the report seriously.

Heath said “It is time for Britain to make a vital choice between tweaking the status quo and letting our economy continue to be crippled by complex and punitive taxes, and drastically changing course with a radical but realistic plan for a tax system for the 21^st century”.

Under the plan corporation and capital gains tax would be replaced with a 30% tax on dividends, interest and rent. Inheritance tax and stamp duty on shares would be scrapped altogether.

Politicians should take note; the commission (a joint project between the Institute of Directors and the TaxPayers Alliance) claim their proposals would establish the UK as a global trading hub. Maybe simplifying the overly complex tax systems across Europe is the real long term answer to the European financial crisis. There is no doubting European economies need a kick start and there is much talk of creating an environment where the private sector can take up the slack caused by austerity programmes. Would simplifying the taxation system help drive this much needed growth?

Given its remarkable successes, Hong Kong’s tax system tends to support the case for a flat tax. More particularly, the history of Hong Kong’s tax system suggests that it is possible to design a flat tax in such a way that it enjoys very broad popular support; but that a flat tax might be feasible only at low level of public spending. It also suggests, however, that a low level of public spending might be politically acceptable if paid for by a flat tax which has very generous allowances and which therefore concentrates the burden on the affluent through a simple and sustainable system .

Well it seems to have served Hong Kong rather well and the Hong Kong tax system has one major advantage over even the most elegant theoretical alternatives. It has been tested for more than 50 years. It works.