Why flat-rate tax is a bad idea
A proposal to introduce flat-rate income tax in Germany may have contributed to the completely unexpected failure of the CDU/CSU to win a workable majority in the recent elections. The proposal was fought tooth and nail by Gerhard Schröder, arguing that it would mean that an industry boss would be paying the same rate as a worker, which might have been correct, but which came over as if Schröder meant the number of Euro would be the same, rather than the percentage, and in any case wasn’t correct as the proposed flat rate would have included a tax-free sum for the first 8000 Euro, meaning that lower earners would have also paid a lower percentage than the managers.
However, I came across an argument in the Independent, referring to the UK tax system, which I don’t recall seeing in the German election campaign. It highlights a major problem of introducing a flat tax if you already have progressive tax bands and lots of deductible personal allowances (which is the situation in Germany today):
10 per cent of UK taxpayers contribute about 50 per cent of the personal tax take, and the average contribution by households is just 18.2 per cent of their income. To get the same revenue, you’d need to charge a flat rate of 23 per cent if you kept current allowances. This would leave 90 per cent of taxpayers – or 27 million people – worse off. Even if you scrapped all but the most basic personal allowances, 22 million taxpayers would be worse off. And if you try to consolidate national insurance into your flat tax, pensioners would be worse off.The authors of that analysis claimed it took ten minutes to do the sums, and half of that was doing research on the internet to gather the necessary figures. Anyone fancy doing the sums for Germany?