AN ARTFUL taxman, according to Jean-Baptiste Colbert, treasurer to Louis XIV, so plucks the goose as to obtain the most feathers for the least hissing. The issue of how it is best and most fair to tax is one that continues to vex governments. One proposed solution is the so-called 'flat tax, in which a single percentage or rate would be applied to all taxable income and profits without exception or exemption. That is, instead of a 'progressive' tax system where, the more you earn, the greater percentage of your income you pay in tax, under a flat tax everyone would pay exactly the same percentage regardless of their wealth or circumstances. This would also apply to the many areas where currently 'tax credits' or 'tax loopholes' allow some kinds of income, profits and expenditure (not all goods are subject to a sales tax, for example) to be taxed at different rates to others; again, under a flat tax all this would be done away with and a single rate of tax imposed on all income and expenditure, without exceptions or exemptions. Proponents of a flat tax stress the simplicity this brings to a currently complex tax system, and argue that it represents a far more fair way to fund government expenditure. The plans also usually incorporate a 'personal allowance', a level of income beneath which there will be no flat tax on income at all. Opponents tend to focus on the economic utility of the tax credits and exemptions to be abolished, and the regressive and 'unfair' nature of the tax in shifting a greater burden of funding state expenditure to the poor and middle class. This debate largely takes place in the form of contrasting and comparing a system of 'progressive taxation', as currently exists in most nations, with a flat tax system.
In a welfare state such as the United Kingdom, everyone enjoys the same access to services provided by the government, and so it should stand to reason that everyone should also contribute equally to the funding of those services. As not all individuals are equal in their wealth and income, it is impossible to do this on the basis of everyone paying in the exact same numerical amount of money. However, this parity can be achieved by everyone paying the same percentage of their income in tax to the government, and this is exactly what a flat tax is, and so equality in contribution to government services (mirroring equality in access to government services) is achieved. This principle of equality is important for two reasons: firstly, if wealthier citizens feel they are being unfairly burdened by the current requirement that they pay higher percentages of their income to fund government services than those on lower incomes, they may feel a disincentive to work hard (which creates wealth for the whole economy), or may even be driven abroad to states with lower rates of taxation or to tax havens. Secondly this removes the ability of the majority of a population to engage in what the French economist Bastiat called 'legalized plunder', where they (as the majority of voters) assign higher percentages of income tax to the wealthy in order that the state may appropriate and redistribute it to them for their own use. With a flat tax in place, there would be no ability for anyone to vote for a tax rise simply on other people and not on themselves, and thus such policies would receive more consideration and not be used by the majority simply to appropriate the property of others through the law. Thus a flat tax is fairer as it equalized the basis on which everyone pays for access to equal services, and prevents a poorer majority from victimizing a wealthier minority through punitive rates of income tax for the wealthy, which may cause them to flee the country for other states with less taxation.
 Ramos, Joanne “Places in the Sun”. The Economist. Feb 22nd 2007 http://www.economist.com/node/8695139?story_id=8695139
 Bastiat, Frédéric. The Law. Ludwig von Mises Institute. 2007
The aim of a welfare state is to allow provide access to vital services for all, but especially for those who could not otherwise afford them -to lift the burden of poverty somewhat. A flat tax, however, would actually increase the burden on the poorest. For example, if under a progressive taxation system the highest rate of tax was 50%, and the lowest 10%, if tax revenues were to be maintained when switching to a flat tax system, then it would be impossible to simply extend the 10% rate of tax to all, as this would mean a large effective drop in revenue (as 40% less is collected from the top bracket with no gains anywhere), and so the rate paid by all would have to be somewhere between 10% and 50%, meaning an effective tax rise on the poorest and middle classes, while the richest receive an effective tax cut. This hardly seems 'fair' or in keeping with the aims of a welfare state, as the argument purports to serve.
 Ulbrich, Holley. “Flat Tax Is Class Warfare”. U.S. News & World Report. April 12, 2010. http://www.usnews.com/opinion/articles/2010/04/12/flat-tax-is-class-warfare
The current system of 'progressive' taxation whereby higher earners are taxed a higher percentage of their income requires the identification and administration of multiple different tax brackets spanning the entire spectrum of earnings in a nation. This causes a number of problems. The brackets themselves may be largely arbitrary cut-off lines based around round numbers, with no real justification as to why one person increasing their earnings by as little as £1000 should lead to them suddenly being propelled to a new tax bracket, when the actual difference to their income is negligible in overall terms. Moreover, the administration of multiple tax brackets is incredibly complicated and difficult, requiring every taxpayer to record their income and expenditure (in order to try and qualify for tax exemptions and 'loopholes') in meticulous detail and then to properly express this on lengthy and complicated government forms, a process which can cause anger, frustration and alienation amongst taxpayers. In order to try and prevent tax evasion, governments are consequently compelled to have large bureaucracies that oversee this process and comb through looking for fraud, a costly and lengthy process. This may be contrasted with a flat tax system by taking the example of taxes on salaries paid to employees by a company under both systems. In the status quo, a tax collector must be aware in detail of exactly what is being paid to whom in order to ensure that everyone declares their income truthfully, allowing them to be placed in the correct bracket. However, under a flat tax, a tax collector could simply withhold the fixed flat tax rate (for example 20%) of the total company's payroll without needing to know what was paid to whom, as every pound is taxed at the same rate and thus it does not matter what goes to whom. This would allow for a massive simplification of tax forms, and for the down-scaling of the costly government departments dedicated to administering the different tax brackets. Thus the simplicity of a flat tax is a significant advantage.
The much-acclaimed simplicity of the flat tax in fact makes it too simple to properly reflect a very complicated reality. Goods and services vary in order to make them accessible to different people; there exist both luxury and economy versions of the same goods because companies recognise that people have differing ability and willingness to pay, and hence price these goods differently. It would therefore be strange for the state to tax both kinds of good at the same rate, as if their respective buyers had the same discretionary income and could both afford to buy the product with the additional uniform flat tax on it.
Tax credits, deductions and loopholes distort resource allocation in a market situation because people respond to the differing tax rates and so put more resources into the areas which the loopholes apply to than they would otherwise. For example, current tax credits for investment mean that more resources go into investment than they would in the absence of that credit, as the returns on the placing of resources in this area are higher than others (as it is subject to a lower rate of tax). A government may even set certain tax credits and loopholes which favour certain industries or economic sectors, such as agriculture, on the basis that this is politically useful (in winning votes), when this again distorts resource allocation in the economy. These distortions may prove harmful as they cause certain sectors to be over-valued or over-invested in due to their favourable tax status, to the detriment and neglect of other more highly-taxed areas (for example, manufacturing) which may in fact be the more economically sound. A flat tax would abolish all 'credits' and 'loopholes' (and the politically-influenced government discretion which decides who gets credits and who does not) and therefore restore genuine market conditions without these harmful distortions.
This argument ignores the fact that there is still another channel for the allocation of resources, namely the government. In the given example of agriculture tax credits verses manufacturing without such credits, if resources did not go into agriculture because of the special credit, they would have gone not into manufacturing but into government (through the closing of loopholes, and thus the disappearance of a means of being taxed less), and government is far less neutral to the market than any other allocation. Therefore, if the argument assumes that the best allocation of resources is that which most closely resembles a genuinely free market, then in this example a flat tax produces a worse situation, as any allocation of economic resources in the private sector (no matter how 'distorted) is closer to the free market (and thus 'better), than if those resources went into the hands of the government. So if reflecting the market is the uppermost concern, a flat tax is a worse proposition as it brings into higher rates of taxation many areas which currently are less taxed ('loopholes'), thus distorting the market even further as even more resources fall into government hands
The arguments in favour of a flat tax argue that it is more 'fair' than other forms of taxation because it theoretically treats all persons and all forms of income equally by taxing them all at the same rate. This firstly fails to explain why any arbitrary percentage at which the tax is set is necessarily the 'fair' number and thus why everyone should receive the wonderful privilege of paying that exact number and not another based upon their income, expenditure and circumstances. The effect of the tax upon different individuals in different circumstances is thus key to the tax's supposed 'fairness', and to the undermining of this argument. For example, say both Mr Smith and Mr Jones earn £50,000 a year. However Mr Smith is a young man with few assets who relies upon his personal savings to finance a future business, and Mr Jones is an old man who has already built up or inherited £500,000 in assets. There is no clear reason why it is 'fair' for them to both pay the same rate of taxation despite their vastly different circumstances and the effect that the tax would have upon each of them, as Mr Jones' built-up wealth is protected, but Mr Smith's ability to build up assets and start a business in the first place is undermined. Or take the example of a sick man and a healthy man with the same income, but one of whom thus has much higher medical costs to pay. In the status quo they can be taxed differently (by allowing for income tax deductions for healthcare expenditure), however under a flat tax they would both be taxed the same, and it this would severely harm the sick man. Therefore, it seems counter-intuitive that in a world where all individuals are not the same and rates of taxation impact in highly different ways upon individuals depending on their differing circumstances (over which they may have little control), that every individual should pay exactly the same rate of tax, as if they were all the same. That hardly seems 'fair'.
This argument fails to account for the fact that elected governments are even worse at determining what is 'fair' when it comes to tax policy than the arbitrary circumstances described when the government has the option to tax different persons at different rates on the basis of their income. In effect this allows the less wealthy majority to decide what the 'circumstances' of the more wealthy minority mean they 'should' pay in taxes, which may in fact be inaccurate and based more upon a desire to 'punish' the wealthy and appropriate their resources for the majority in an unfair manner. This populist tendency in elected governments is what makes them so bad at deciding 'fairly' based upon 'circumstances', not sectional or class interests, and so why the power to set different tax rates to different people should be taken out of the hands of the government by instituting a flat tax.
Many of the so-called 'loopholes' which a flat tax would close, by ending the exemptions given when you engage in certain kinds of expenditure under the current income tax system, are actually positive features which incentivize 'good' economic behaviour. One of the great advantages from owning a home, for example, is the resulting ability to deduct mortgage interest payments from taxes. This makes owning a home more expensive, meaning a greater number of people will be able unable or unwilling to buy homes, and will thus be forced to rent instead. This harms their long-term economic prospects, as their mortgage payments would result in them eventually owning an asset whereas rent payments bring them no return, and as self-owned homes become in less demand, the value of the homes which hundreds of thousands of people have already spent decades paying mortgages for will plummet. This would also cause great harm to the construction industry as fewer people can afford to buy new houses. Another example of a useful 'loophole' is that profits and capital gains are currently taxed differently. Under a flat tax they would both be taxed equally, representing a kind of 'double taxation' which would hit most heavily new, young venture capitalists going into high-risk industries, and so will stifle investment and innovation. Finally, the current income tax deductions we allow for charitable giving would be 'closed' with a flat tax, and hence charitable giving would become less affordable and less attractive to most taxpayers. Thus, the closing of these 'loopholes' will in fact disincentivize what we consider to be beneficial economic behaviour, leading to a worse economic state for everyone.
This argument again assumes that governments do a good job of deciding what areas and sectors 'deserve' loopholes and which do not. The fact that the distribution of resources would change if we abolished certain tax loopholes is probably a sign that these areas have been artificially inflated in terms of their resource allocation by these very tax credits and loopholes, and should therefore be returned to market standards. The selection of many of these sectors for credits may well have been done not on an economic but rather on a political basis, for example in order to protect jobs in some sectors and help boost a government's votes at election time.
'Regressive' means that a tax impacts upon the poor more greatly than upon the rich, and this is exactly what occurs with a flat tax. Because everyone pays the same percentage, both a rich and poor man would for example pay 10% of their income in tax. As the poor spend a greater percentage of their income on their basic necessities (such as rent and food) than the rich do, as the rich have far more discretionary income to spend on luxuries. Therefore, the impact of a 10% tax upon a poorer person is far greater in terms of limiting their ability to buy things they may want or need than it is upon a richer person, and consequently the harm of taxing a poorer person at the same rate as a richer person is greater than the harm of taxing a richer person at a higher percentage. Even if the 'personal allowance' allows the poorest in our society to exempt their income from the flat tax (which, of course, offers no relief to the middle class, who now pay a greater percentage tax on their income), they will still be significantly worse off as a consequence of the sales component of the flat tax. This again stems from the poorest spending a greater percentage of their income on necessities, which are not currently subject to sales tax (VAT). Once these VAT 'loopholes' (such as on books, children's clothing and food) are closed, the poorest will be harmed as they have to pay out even more to obtain the necessities of life. Both These increased harms breed resentment and can lead to social disorder, as was seen in the UK in 1990 when an attempt to introduce a 'poll tax' (a form of flat tax, with everyone paying the same charge) led to severe rioting in London and caused the plan to be abandoned. Therefore the regressive nature of a flat tax makes it undesirable and more harmful than current forms of taxation.
 Encyclopedia of Business. “Discretionary Income”. Enotes. http://www.enotes.com/biz-encyclopedia/discretionary-income
 BBC On This Day “1990: Violence flares in poll tax demonstration” BBC Home http://news.bbc.co.uk/onthisday/hi/dates/stories/march/31/newsid_2530000...
The status quo, whereby governments select what areas to tax and at what rate, leads to even more examples of regressive taxation than is alleged of flat taxes. For example, the so-called 'sin tax' on alcohol and cigarettes are designed to limit people's consumption thereof (and thus mitigate the harms of excessive consumption and abuse), but in fact have highly regressive results. This is because those on lower incomes are both more likely to consume large amounts of alcohol and cigarettes, and because this expenditure thus represents a larger share of their income. Consequently, by proportion the taxes on alcohol and cigarettes actually redistribute wealth from the poor to the rich. Therefore there is no reason to believe that government discretion in what is taxed and how much actually leads to less regressive taxation; it may even be more so.
 Barro, Josh. “Alcohol Taxes are Strongly Regressive”. National Review Online. March 25, 2010 http://www.nationalreview.com/agenda/39020/alcohol-taxes-are-strongly-re...
Bastiat, Frédéric. The Law. Ludwig von Mises Institute. 2007
Barro, Josh. “Alcohol Taxes are Strongly Regressive”. National Review Online. March 25, 2010 http://www.nationalreview.com/agenda/39020/alcohol-taxes-are-strongly-regressive/josh-barro
BBC On This Day “1990: Violence flares in poll tax demonstration” BBC Home http://news.bbc.co.uk/onthisday/hi/dates/stories/march/31/newsid_2530000...
The Economist Special Report “The case for flat taxes” The Economist. Apr 14th 2005. http://www.economist.com/node/3860731
Encyclopedia of Business. “Discretionary Income”. Enotes. http://www.enotes.com/biz-encyclopedia/discretionary-income
Ramos, Joanne “Places in the Sun”. The Economist. Feb 22nd 2007
Rothbard, Murray. “The Case Against the Flat Tax”, The Free Market Reader. Auburn. Mises Institute. 1988 http://mises.org/rothbard/flattax.pdf
Ulbrich, Holley. “Flat Tax Is Class Warfare”. U.S. News & World Report. April 12, 2010. http://www.usnews.com/opinion/articles/2010/04/12/flat-tax-is-class-warfare