We need a flat tax with no loopholes to reduce avoidance

Allister Heath
HYPOCRISY barely starts to describe it. Left-wing comedians – you know, the kind that love to attack the City, ridicule aspirational values, question the motives of those in business and who wear their champagne socialism on their sleeve – are not supposed to be extreme tax avoiders. So the news that Jimmy Carr, one such stand-up comic – I can’t stand his humour, but millions love it – is using a dubious (albeit entirely legal) scheme to eliminate most of his income tax liabilities has shocked many.

If you want others to pay more tax, then you should be consistent and pay as much as you possibly can yourself – you should even consider paying more than you have to by making a donation to HMRC or to government-owned institutions, such as NHS trusts. Those who believe taxes are moral in of themselves – a commitment to the common good – should practice what they preach. Yet if the allegations of massive, albeit legal, avoidance involving Carr are right – he hasn’t denied them – a man who specialises in ridiculing others, often in the cruellest of ways, may now end up as the butt of others’ jokes.

That said, the overall argument is far more complex than is usually understood. Here is my take. People should have the right – and companies the duty to their shareholders – to legally minimise their tax bills. I disagree with the left-wing view on taxes: they are a necessary evil, not a moral good. Taxes should be as low as possible for reasons of individual liberty and economic efficiency. People spend their money better than government employees do; lower taxes and public spending would generate more economic growth and thus more resources to be spent on things such as healthcare and education.

Far more money should, over time, be spent on healthcare – but for that to be viable and efficient we need to introduce a mixed economy in health. Tax money will no longer be able to fund everything. There are lessons to be learnt in how to reform health, education and pensions – and introduce more private money while helping the poor – from the Netherlands, Australia, Germany, Sweden, Singapore, even France – and many other progressive countries.

But that doesn’t make the kind of scheme apparently used by Carr right. My issue is three-fold: some extreme tax avoidance schemes that are currently legal should be banned; the present tax system is excessively penal on anybody who doesn’t use such schemes; and the only way to sustainably and fairly reduce avoidance is to scrap the current, deeply defective tax code and adopt a new, much simpler and flat tax system.

It is unjust that some people can pay virtually no tax while others with identical circumstances but no access to expensive advisers have to pay lots. Such extreme schemes – which are not to be confused with ways of paying less tax that are deliberately promoted by the authorities, such as ISAs, duty free shopping, pension tax relief – are clearly unintended loopholes in an extremely complex system. They need to be abolished.

All tax rates are too high, on the poor and on the rich. The tax system is trying to raise too much, because it is so inefficient and counter-productive, and because spending is too high. There is only one long-run solution to reduce avoidance: we need a much simpler, lower and more transparent tax system. We need a flat tax with a wide base, where all income – from labour or capital – is taxed at the same, low rate, with no loopholes. Until we adopt such a system – of the sort outlined by the 2020 Tax Commission, which I chaired – injustices and inequities will remain rife.