The Tory tax bombshell that would clobber middle earners

A senior Tory at the heart of government policymaking has let slip that the Conservatives are considering a new tax plan which could hammer middle and low earners.

A flat tax would clobber low and middle income taxpayers, according to the Institute for Fiscal Studies

A senior Tory at the heart of government policy making has let slip that the Conservatives are considering a new tax plan which would hammer middle and low earners.

Oliver Letwin, the minister for government policy, confirmed during a speech earlier this month that a “discussion” on a flat tax would “no doubt open up in future”.

He said the Conservatives were “not in a position” to implement the policy in tight economic times, but he added that “there may come a time when the situation is different and the situation will no doubt open up at that point”.

Letwin is minister for government policy and is responsible for developing new policies along with the cabinet office. He has previously been described as the government’s “intellectual sage”.

His intervention follows praise of the flat tax by other senior Tories, including the chancellor George Osborne. Osborne has previously called the flat tax a “very exciting idea”:

“[The flat tax] is a very exciting idea, that started in central and Eastern Europe, but is now being looked at by other countries like Greece, and there is some speculation that Germany is looking at it. And it clear away all the complexity of the tax system.” – Radio Four Today Programme, 7 September 2005.

Mayor of London Boris Johnson has also said that a flat tax could “work brilliantly”.

And yet a flat tax would clobber low and middle income taxpayers, according to the respected Institute for Fiscal Studies (IFS). In a 2006 study, the IFS found that a flat tax at 22 per cent would mean that anyone with an income of less than £44,110 would lose out, with those on incomes of around £38,000 a year hit particularly hard:

“…the biggest loser in cash terms would be someone with income exactly at the effective higher-rate threshold (currently £38,335 per year), who would lose £924 per year or £17.77 a week. The break even point is £44,110 –  anyone with income below this level…would lose out, and anyone with income above this level would benefit from the reform as the gains from eliminating the higher rate outweigh the losses from increased tax rates on lower tranches of income.”

Flat taxj

Middle and lower earners take a bigger hit for two reasons:

1)  In order to pay to lower tax rates for higher earners tax rates for lower earners have to go up.

2)  Flat taxes weaken the work incentives of lower-income individuals because they decrease the benefit experienced by the poorest when they move into work or increase their hours.

The IFS also found very little to support claims that the flat tax introduced in Russia has resulted in an increase in personal tax revenue going to the government.

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