An agenda for tax reform

The UK needs a tax system for the 21st century, that delivers large and stable revenues without penalising either savings or incentives for successful people. We show that this can be done by rebasing the income tax system on consumption, and cutting marginal tax rates in the process. A good tax system is one that creates the minimum damage to everyone’s incentives to work and save - the ‘Ramsey Principle’ - consistently with financing government spending and achieving the necessary income redistribution. This is achieved by taxes that are ‘flat’ (i.e. the same proportional rate) across people of all incomes (the popularly known ‘flat tax’); that are flat across commodities of all sorts (‘tax neutrality’); and that are flat across time. This means that the tax rate is constant over present and future consumption; it implies both that tax should be levied on consumption and that the tax rate should be planned to be constant under forecast conditions (‘tax smoothing’).