Flat taxes

This is an oldie from this time last year but worth a plug – a paper produced for the IMF on the impact of ‘flat taxes’ (ie one rate for everyone). Proponents have put forward a range of arguments in favour of flat taxes such as that they are fairer, simpler, lower and can actually increase tax revenue (because people will work harder if taxed less, there will be less tax avoidance etc). Pretty big claims, obviously.

Although my lefty kneejerk reaction is against anything that moves away from a redistributive tax system, I do try and keep an open mind and think through whether new policy approaches would actually benefit working people, regardless of what my existing views lead me to want to believe. But luckily in this case I didn’t have to go through the unwanted hassle of changing my views (again) as you will see from the abstract of the paper below.

It is worth a read in its entirety. One important political point worth making is that flat taxes benefit those at the bottom and the top at the expense of the middle. Therefore such an approach would a very difficult political ‘sell’ in a developed country like the UK where the middle tends to determine election victories.

Full paper can be downloaded here.

Summary: One of the most striking tax developments in recent years, and one that continues to attract considerable attention, is the adoption by several countries of a form of "flat tax." Discussion of these quite radical reforms has been marked, however, more by assertion and rhetoric than by analysis and evidence. This paper reviews experience with the flat tax, seeking to redress the balance. It stresses that the flat taxes that have been adopted differ fundamentally, and that empirical evidence on their effects is very limited. This precludes simple generalization, but several lessons emerge: there is no sign of Laffer-type behavioral responses generating revenue increases from the tax cut elements of these reforms; their impact on compliance is theoretically ambiguous, but there is evidence for Russia that compliance did improve; the distributional effects of the flat taxes are not unambiguously regressive, and in some cases they may have increased progressivity, including through the impact on compliance; adoption of the flat tax has not resolved common challenges in taxing capital income; and it may have strengthened, not weakened, the automatic stabilizers. Looking forward, the question is not so much whether more countries will adopt a flat tax as whether those that have will move away from it.