A dip in the middle

Source: The Economist (adapted)

Sep 8th 2005

Income tax has been paid in Britain for more than two centuries. First introduced by William Pitt the Younger to fi nance the war against Napoleonic France, it is the Treasury´s biggest source of revenue, raising 30% of tax receipts. It arouses strong political emotions, regarded as fair by some because it makes the rich pay a bigger share of their income than the poor, but unfair by others because it penalizes enterprise and hard work.

During the past 30 years, income tax has been subject to sweeping changes, notably the cut in the top rate from 98% to 40% under Margaret Thatcher between 1979 and 1988. Now another Conservative politician, George Osborne, is fl oating a radical reform to match that earlier exploit. The shadow chancellor announced on September 7th that he was setting up a commission to explore the possible introduction of a fl at income tax in Britain.

Introducing a fl at income tax into Britain would involve two main changes. At present, there are three marginal tax rates. These three rates would be replaced by a single rate, which would be considerably lower than the current top rate. At the same time there would be an increase in the tax-free personal allowance, currently worth 4,895 pounds.

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