(Photo: Getty)

    Is now the time to introduce a flat tax?

    15 July 2020

    The Chancellor, Rishi Sunak, has ordered a review into capital gains tax, in the first of what may be many attempts to tease more revenue out of UK taxpayers.   With the public deficit this year now looking like being well over £300 billion, he doesn’t have a lot of choice. May’s GDP figures, showing a rebound of only 1.8 per cent from April’s deep trough, has dashed hopes of a swift economic recovery riding to the rescue.

    Trouble is that tax rises alone are not going to be enough to dig Britain out of its very deep fiscal hole. A UK government last balanced the books in 2002; since then we have been through good and bad times, Labour and Tory governments, plus a coalition, and none of them have succeeded in raising enough revenue to cover their spending programmes.

    It has become all but politically impossible to balance the public books – any government which attempts this will be damned as following ‘austerity’. Yet somehow, sooner or later, we are going to have to stop living like feckless shoppers maxing out on half a dozen credit cards. While it might seem out of fashion at the moment, before too long we are going to have to start looking at a smaller state.

    All this said, there is much to cheer Sunak’s review of capital gains tax. It is all-too-easy for the wealthy to avoid tax by engineering income as capital gains – and taking advantage of lower rates and generous allowances. Chancellors have long bleated about tax avoidance, yet they have fuelled the industry by setting wildly different rates for different forms of income and capital gains.

    If Sunak is really brave he should go the whole hog and introduce a flat tax – which taxes pretty well everything, whether it be income or capital gains, earned or unearned, at the same rate. Why not? Why should I pay less tax on capital gains I have made on shares than on dividend payments? Why, absurdly, am I liable to pay less tax on income from investments than on money I have earned through work (which is liable for National Insurance on top on income tax)? Why not abolish inheritance tax and treat inheritance exactly as any other form of income?

    A flat tax has been toyed with in the past, mostly notably by George Osborne before he became Chancellor, but has been rejected as too ambitious and too liable to upset too many people. But such is the need for government revenue now that finally its hour may have come. Part of the reason it has been resisted is that some people assume it would mean a flat rate of tax – with millionaires paying the same rate as people in low-paid jobs. That is what happens, for example, in Russia – where there is not even a tax-free allowance.

    But it doesn’t have to mean that at all. There is no reason why we couldn’t have, say, a two rate flat tax, of 20 per cent and 40 per cent. The important element is that all income, capital gains etc are treated the same way – and that therefore there are far fewer opportunities for avoidance.