How the East went flat and blossomed

I’M JUST back from visiting eastern Europe. Invited to give them tips about liberalising their business environment, I learned humility very quickly.

Having suffered under tyranny for generations, the countries behind the former Iron Curtain have far more radical free market instincts than our ever-compromised leaders.

The exuberance in their new freedom is infectious. One of the ideas proving successful is the notion of a simple flat tax. The three Baltic nations followed the example of Russia.

They have been followed by Slovakia, Ukraine and Serbia. The rates differ but the idea is a jolt still. Croatia looks likely to follow next year.

I was a guest of the Adriatic Institute of Public Policy and the two great experts on the flat tax ideal, Alvin Rubushka and Dan Mitchell, were on their best evangelical form.

The idea is not an alien one only fit for Slav nations with their unhappy heritage. The Channel Islands apply only a flat tax of 20 per cent. They opted out of the Inland Revenue's mainland complexities.

The 20 per cent applies to both individual and corporate income. Guernsey and Jersey do not collect VAT. The result is a bustling prosperity. This newspaper is owned by those enjoying these benefits.

Although we could travel far and deep back in history to find examples of low taxes casting a benign spell - and the obverse, high complex taxes ruining empires - the first modern example of the application of the principle is the Hong Kong Revenue Ordinance of 1947. It applies a flat tax on gross income of 16 per cent.

This is dire news for accountants who feast in a system ordinary mortals cannot comprehend. Hong Kong has no sales tax, or VAT, or capital gains or inheritance taxes.

This was all devised and implemented by Sir John Cowperthwaite, the St Andrews-based financial guru. The natural reaction is to assume lower taxes necessarily mean lower revenues for the politicians to spend on their favourite projects. Yet I know of no example where lower taxes have not resulted in higher revenues.

This seems a paradox, yet we have experienced this in Britain recently. Margaret Thatcher, or more precisely her Chancellors, Howe and Lawson, cut the higher income tax rates from 86 per cent to 40 per cent - to the Treasury's greater enrichment.

Is this not flat earth economics ? It seems that low simple uniform taxes free people to busy themselves in trade. Businesses get on with business. They spend no time evading or devising schemes to duck tax.

I think of myself as not unintelligent but I cannot do my tax return and hire professional advice to explain the jargon.

Few people truly comprehend the vastly complex British tax system. This includes the experts who have to go to the courts to get agreement on what Parliament intended, or more precisely what the Treasury draftsmen thought ministers required.

It is also thought low flat taxes are a device to help only the rich. The truth is more subtle. As matters stand, the rich actually avoid much of the high taxes as they deploy tactics to avoid tax.

Inheritance tax is a clear example. Those who pay it are ordinary home owners. The affluent go off-shore, create trusts or shell companies. With a simple uniform flat tax, such evasions would not be worth attempting. The beauty of a flat tax is that it wipes out all the tax breaks, concessions and dodges. It is seen by everyone to be fair.

The case for low flat taxes seems obvious. The real difficulty is in getting politicians to embolden their policy aims.

It is not easy for those on the Left to act. They have an atavistic belief their role is redistributive. Taxing the rich to help the poor sounds splendid. The reality is more squalid - more like "pretending to tax the rich but really locking the poor in poverty".

The Conservatives might be looked to favour a radical reform of our tax system not only to revitalise businesses but as an appeal to everyone's self interest. Instead Oliver Letwin, the shadow Chancellor, chooses to offer mild reforms in such a diffident manner that nobody can detect anything specific.

A flat tax reduces all the time and cost of completing tax forms. The very idea of a tax return being no more than a postcard ought to appeal to everyone, bar accountants.

Providing a generous tax-free threshold is agreed, the poor will be exempted from taxation altogether. As matters stand, the tax system hits those on lower and average income far more than the wealthy.

There is a hazard. Our taxes are still a matter of national policy choice. The European Commission is seeking to "harmonise" taxes, beginning with business taxation and VAT. They adopt the metaphor "a level playing field".

I wonder if this is the issue which may provoke a tax revolt echoing the Boston Tea Party?

The economic literature all points to the benefits of low simple taxes - but our regulators and politicians seem to enjoy complexity. All this could be possible with the resolve of Howard's team to become the advocate of a flat tax.

Could the CBI and other business voices ever relinquish their compliance with our multi-barnacled fiscal system? I scarcely thought to find myself suggesting we take economic policy tips from Moscow but the Russian income tax of a flat 13 per cent is a model for us to copy.

The Chinese Communists have even caught the bug. They are to reduce their income tax to a flat 20 per cent next year. Perhaps President Bush could get some policy tips from Beijing. How quickly the world changes. I travelled east to tell them how to be good capitalists. I came back chastened.

John Blundell is director general of the Institute of Economic Affairs.