Supply-side economists are often fans of flat rate taxes because they think that they will
- Help reduce red tape and reduce the resources wasted on tax forms, chasing up non-payers and enforcing complex tax laws. This would reduce the money spent on administering the tax system.
- Reduce inequity (because there is the same tax rate for all) – and having a generous tax free allowance is good news for low income families, improving their incentives to earn extra income.
- Boost incentives for people to work, to save (e.g. for retirement) and for companies to use profits to invest - both of which could increase the country’s potential growth rate.
- Generate increased tax revenue – based on the idea of the Laffer Curve – that cutting tax rates can actually boost the supply-side so much that the government ends up with more tax revenue coming in allowing it to finance increased spending on priority areas.
- A flat tax may make the British economy more attractive to foreign investment. In a global economy in which investors can move freely across country borders, a simple fiscal system attracts inward investment.
- A lower level flat rate tax on savings will positively impact the household savings ratio and thereby have a positive impact on future economic growth. Increased saving would help protect developed economies from threats, such as huge pension deficits, one of the biggest structural threats to developed economies. It can also help to provide the funds for future investment strengthening growth and raising living standards. Currently, income tax is considered to hamper saving and the introduction of a flat rate tax is expected increase the saving rate. The key reason for this is the double taxation of personal savings, firstly on income and secondly on investment income or, once on company profits then on dividends.
