Will the Osborne proposal fall flat?

This column appears in The Times today.

IF BEING LEADER of the Opposition is the most difficult task in politics, being Shadow Chancellor to Gordon Brown is scarcely less challenging. George Osborne has been quietly bolstering his reputation for intelligence and political weight in the role. This makes all the more noteworthy his advocacy this week of a flatter tax system.

The most obvious course for a politician tipped for greatness, yet hampered by a cherubic countenance and a light voice, would be to gain a reputation for solidity. Mr Osborne instead is courting controversy. In a well-trailed speech yesterday he floated the idea of a flat rate of income tax. He has appointed a commission to investigate its feasibility. He argues that even if a pure flat tax is unattainable, “we may be able to move towards simpler and flatter taxes”.

Mr Osborne is responding to a perceived need among sympathisers or potential supporters for a defining idea of modern Conservatism. In a paper published last month by the Centre for Policy Studies, the political commentator Stephen Pollard argued: “Advocacy of a flat tax presses all the right buttons. It is good for the economy. It is good for the poor. It is good for business. And it is easy to grasp.” Matthew d’Ancona, the Telegraph columnist, enthuses: “In fastening on the global flat tax revolution, Mr Osborne has given his party an invaluable navigational tool.”

The praise is premature. The proposals that Mr Osborne is investigating are being oversold. The marketing smacks of another poll tax. A flat tax — the application of a single marginal rate to all taxable income — is different from a poll tax, where everyone pays the same amount. But the proposals have one potentially lethal common characteristic: a serviceable intellectual case can be made for them, without any acknowledgement of the political costs.

To state, as Mr Osborne did on the Today programme yesterday, that “the rest of the world, including many countries in Europe, are reducing taxes” is neither true nor relevant. There has been a widespread move to flat taxes in the economies of Central and Eastern Europe. The recent history of the flat tax proposal outside those economies is more chequered.

The idea of a flat tax, in its current form, came from two American economists, Robert Hall and Alvin Rabushka, in their book The Flat Tax, in 1985. In Congress, the proposal has gained some politically influential supporters, but has never quite shaken off its fringe status from having been a centrepiece of two quixotic presidential campaigns: those of the Democrat Jerry Brown in 1992, and the Republican Steve Forbes in 1996. Brown’ s eccentricity as Governor of California earned him the nickname Governor Moonbeam, while the billionaire Forbes’s radical economic ideas were seen to coincide seamlessly with his own material betterment.

In practical politics, the flat tax was the touchstone issue that fatally weakened the Labour Government in New Zealand in 1987-88. Roger Douglas, the Finance Minister, was a reforming economic liberal who had radically overhauled one of the most closed and sclerotic economies in the free world. For some reason, he proposed a flat rate that made a fiscal shortfall inevitable. His weak Prime Minister, David Lange, latched on to the issue as a populist move to reassert his political authority, but Lange’s critique of the consequences of the flat tax proposal was not wrong. Beyond those cases, the examples of states with a flat rate of income tax comprise either microstates (Mauritius, Hong Kong) or oil-rich states with a flat rate of zero.

None of these offers an auspicious precedent or any clear parallel for introducing a flat tax to a mature economy. The New Zealand controversy, on the contrary, illustrates one of the main potential hazards. Mr Osborne claims that a flat tax might enhance incentives to work while improving the position of the worst-off. But those claimed benefits would materialise only if the tax rate were set low enough and personal allowances set high enough. The Labour Party’s script almost writes itself: a Conservative Government would mean a burgeoning fiscal deficit, or a huge tax break for the rich, or a hidden agenda of massive cuts in public spending.

Mr Osborne is mounting an unnecessarily complicated argument for the idea of simplicity. A flat tax simplifies the tax system not because it imposes a uniform rate but because it ends exemptions. The complicated part of a tax calculation is to assess taxable income — once you have that figure, it is a simple calculation to deduct one, two or several marginal tax rates. If the Tories stuck to the criticism that new Labour has needlessly complicated the tax system through elaborate interventionism, they would make a good point with political resonance. As it is, they present a silver bullet for a non-existent problem, and here lies the potential for political damage.

Mr Osborne believes that flatter taxes are a way of dealing with the supposed competitive threat from India and China. In vain will you read his pronouncements for an acknowledgment that China and India represent an opportunity for sales and investment rather than a threat – consider Airbus.

While the Prime Minister is arguing the case in India for greater international trade and investment, the Tories insinuate that we have an economic problem in the outside world. The prospects for a liberal and modern form of Conservatism are opaque enough without one of its principal advocates, the Shadow Chancellor, abandoning the cause.