Tories to consider flat tax rate

The Conservative party today held out the possibility of an east European style flat tax, with the shadow chancellor, George Osborne, commissioning an investigation of the system pioneered in some former Soviet states.

Mr Osborne today called for "a flatter and simpler tax economy" and announced he would hire a senior business figure to report back next year on whether a completely flat tax regime would be viable in the UK.

The introduction of such a system, which scraps progressively higher tax bands in favour of a uniform (and usually low) percentage, would be controversial, with opponents claiming it is little more than a tax cut for the rich. Flat taxes have so far only been introduced in developing economies seeking to attract foreign investors.

But some Tory strategists, backed by thinktanks such as the Adam Smith Institute and the Economist magazine, believe that the idea's time has come and that a simpler tax settlement would throw into stark relief the complexities built into the existing system by the introduction of tax credits by the Labour chancellor, Gordon Brown.

Mr Osborne said: "What I'm arguing that the Conservative party needs to do is ... to make a long-term case for a lower tax economy and a flatter and simpler tax economy.

"[Flat tax] is a very exciting idea, that started in central and eastern Europe, but now is being looked at by other countries like Greece, and there is some speculation that Germany is looking at it.

"And it clears away all the complexity of the tax system."

"I am fully conscious that we may not be able to introduce a pure flat tax, but we may be able to move towards simpler and flatter taxes," he told BBC Radio 4's Today programme.

Mr Osborne acknowledged that there were problems with the idea. A pure flat tax would, for example, not offer tax relief on pension savings.

But he insisted that a flat tax system need not be regressive. Most systems involved a very high personal tax allowance, he pointed out.

A simplification might see no taxes paid on the first £10,000-£12,000 of income, rather than a sliding scale, at present, starting from around £4,600.

In a speech prepared for the Social Market Foundation thinktank in London today, Mr Osborne highlights how the poorest fifth of households currently pay the greater tax burden.

He also - indirectly - criticises the last Tory election campaign, saying some of the party's tax pledges were seen by the electorate as "election gimmicks". The Tory leader, Michael Howard, left it until a few days before polling day to announce he would raise the threshold for paying stamp duty on properties and scrap a planned council tax band re-evaluation.

The shadow chancellor - who is not standing in the ongoing Tory leadership contest, backing his friend and colleague David Cameron - said in his radio interview that the commission would examine the merits of "flatter, simpler taxes for Britain", up to and including the case for an outright flat tax. The results of its investigations would be available to all political parties.

A flat tax system has been introduced in 11 countries, mostly in eastern Europe, and politicians in other, more mature, economies are now beginning to take an interest in the idea.