Although it is hardly likely to happen, there is at least a theoretical possibility that the Enron scandals of this world might act to the b...

Although it is hardly likely to happen, there is at least a theoretical possibility that the Enron scandals of this world might act to the benefit of taxpayers at large and result in demands for a lowering of taxation.

There are various groups who assert that a flat tax is a better way to tax people. Their arguments can be summarised as follows: if governments concentrate on providing inexpensive, effective and narrowly defined physical and social infrastructure, the overall tax burden on individuals and companies will be reduced. If the governments go a stage further and simplify the calculation of tax, the very substantial cost of collection and policing will also drop.

It follows from this that if tax rates are reduced to a sufficiently low level, in other words one at which taxpayers consider that they are getting value for money, the incidence of tax evasion is likely to drop also. Even tax avoidance could become either impossible or simply not worth the cost of creating complex structures. If all governments taxed at a uniformly low rate, moreover, the use of cross-border avoidance strategies would also become unnecessary.

The simplification of taxation revolves largely around allowances and grants. The abolition of write-down allowances and tax relief on expenditure, including salaries, would affect profits in the short term. This would cause consternation, but the difference would be largely set off by the generally lower rate of tax.

In the case of individuals, the retention of personal allowances would help the low paid. The abolition of higher rate income tax would reduce the desire for tax reduction strategies in all but the highest earners. It would also ease the brain drain to lower net tax countries.

The provision of benefits in kind should be simplified to be the actual cost paid. The move to what amounts to a turnover tax would wipe out an entire industry of tax professionals.

On some estimates, the application of a flat revenue tax would mean that it is possible to set that tax at a level that avoids the need for sales and service taxes which are complex to administer and are becoming more so as even small businesses begin to operate internationally.

Estimates of the requisite level of taxation vary from ten per cent to 15 per cent of turnover or gross income. Although not intending to abolish VAT, the Irish government stated that it intended to simplify corporation tax and fix a flat 12 per cent rate. European finance ministers have said that to do so would distort the market and would be inconsistent with membership of the euro.

Hong Kong has a rate of 15 per cent, although it should be recognised that the territory houses a lot of people in a small space and therefore the cost of infrastructure, on a per capita basis, may be less than in more sparsely populated countries.

It therefore follows that if governments have the courage to take a radical view of taxation, much of the infrastructure used by international companies to hide profits - and, as we now learn, losses - will fall into disuse. As will much of the incentive to evade tax. As we have suggested at the top, however, this will never happen.

This article originally appeared in Nigel Morris-Cotterill's World Money Laundering Report. Nigel is a litigation lawyer by training and still practices as a consultant to the solicitor's firm of Norman Saville & Co in London.