Abolish 20 taxes and set 15% flat rate of income tax in UK, says report

Institute for Economic Affairs says changes would make those at top 13% better off, but incomes of those at bottom would rise 26%

National insurance, business rates, stamp duty, the TV licence fee and excise duties on alcohol and tobacco should be among 20 taxes abolished by the government, a free market thinktank has said.

A report published by the Institute for Economic Affairs has proposed a 15% flat rate of income tax and a VAT shakeup as part of a plan that would significantly reduce the size of the state.

If all the proposals were enacted, the richest 10% of the population would see their incomes rise by more than £13,000 a year on average, but the IEA said those on the lowest incomes would see bigger percentage gains from the changes.

It said cutting tax as a share of national output, from the current level of 37% to between 20% and 25%, would lead to stronger growth and a 26% increase in the gross incomes of those in the poorest decile. Those in the top decile would enjoy a 13% increase.

According to the economic models used by the authors of the report, a fall of 10 percentage points in tax as a share of GDP would lead to rise in output of 24% over the next three decades, equivalent to a 0.8% rise in the growth rate.

“The UK has a very badly designed tax system with high marginal rates, huge complexity, taxes that discourage wealth-creating economic activity and wide-ranging exemptions,” the report said.

“Overall, the UK government should abolish 20 current taxes. Among other taxes, corporation tax, national insurance, capital gains tax, inheritance tax, council tax, business rates, the television licence fee, the apprenticeship levy, stamp duties, alcohol duties, tobacco duties, vehicle excise duty and air passenger duty should be abolished.”

The IEA said a new, slimmed-down tax system should include:

• A flat income tax rate at 15%, with a personal allowance of about £10,000. Profits distributed to shareholders taxed at 15%.
• VAT at 12.5% with most of the current exemptions removed.
• A housing consumption tax set at 12.5%.
• A location land value tax.
• A halving of fuel duty.

The report said public investment as a share of GDP had been halved from 6% to 3% of GDP since the 1960s, while welfare payments had almost doubled to 14% over the same period.

Mark Littlewood, the IEA director general, said: “The economic evidence is clear: spending is far too high and the tax system is far too complicated. This new report provides a rigorous approach to discovering and documenting the size of the state and how government spending and regulation affect the wider economy.

“But, most importantly, the authors have undertaken an original statistical analysis of the economic costs of high taxes and which of those are the most pernicious.

“It provides a manifesto for how to create a lasting legacy of an economy with lower and simpler taxes that will boost prosperity for all.”