Flat tax arguments1/31/2024 In recent years Latvia and Lithuania have both dropped their flat taxes and moved to a progressive system. And the role of flat taxes in generating increases in the tax take in Russia and elsewhere has proved hard to quantify since those economies were at the same time subjected to so much additional radical reform. By contrast, the UK has a well-established legal, corporate and fiscal framework, where the view that a flat tax could lead to a big jump in compliance looks much shakier. Those countries in eastern Europe that adopted flat taxes were all relatively poor with relatively weak governance and correspondingly large catch-up opportunities. Flat taxes can also cut away all the confusion and complexity that lets evasion and avoidance thrive – and hence allows resentment of the rich to fester. As such, flat taxes bring in more revenue notwithstanding the lower rate, and can even mean the rich pay a bigger proportion of the total. Proponents of flat taxes argue that they pay for themselves, since the higher rates of compliance and the expansion of economic activity contribute to the broadening of the tax base. As such, the flat tax is typically favoured by small-state conservatives and economic liberals. The rationale is that by simplifying the tax code – and making the single rate sufficiently low – you save people and businesses time and money, drive up compliance rates by reducing the incentive for tax evasion or avoidance and stimulate the economy by increasing the incentives for extra effort and risk-taking. A simple flattening of income-tax rates alone does redistribute towards those with high incomes, but if NI contribution rates are also flattened, it tilts the reform in favour of lower earners. According to economic modelling by the Institute for Fiscal Studies – examining four potential flat-tax structures for the UK, all of them intended to be revenue-neutral – some versions of a flat tax would in fact be progressive, in the sense of favouring lower earners. Thus the tax remains progressive at lower rates of income and tax, but becomes close to proportional at higher incomes (ie, as the exempt amount becomes a steadily smaller share of the total income). Most models do include an exempted amount of income and sometimes a significantly increased personal allowance.
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