I LIKE the idea of flat taxes. The UK has to do something to become competitive again. In the past few years the UK piled on stealth taxes, as new Eastern European democracies went straight for low flat taxes and the Irish Republic put out the business welcome mat with a fabulous low tax offer.

Like most things in life there is no free lunch. You need to work hard at flat taxes. If you are going a little portly you can try buying new clothes to pretend your stomach is not growing, or you can swap the sweets for the fruit until your stomach lies flat again. Only the second method makes you healthy and works in the longer term.

It’s the same with flat taxes. You have to work at cutting and controlling public spending so you can afford them. Then you have to keep up the good work to make sure you do not have a relapse. Flat taxes will in due course attract more business and more rich people here but to have a low enough tax to begin with there will be sacrifice of revenue.

The first rule of tax reform is there are losers and winners. Losers are vocal. They set out to stop your changes. Winners are quieter and give little support to the government that is piloting through reform.

The idea of the flat tax is to replace tax exemptions within the income system with a lower rate overall. In the UK, the biggest exemptions are ones to pension funds, worth £12.9 billion in 2004-05, the child and working tax credit, at £4.1 billion, and various savings schemes at £2.6 billion. The £22 billion of tax forgone from all exemptions compares with the £127 billion estimated yield of income tax in 2004-05. The abolition of all these would not buy much of a reduction in the standard rate, as well as the cost of cancelling the higher rate. But it would run counter to the need to encourage people to save more in general, especially for their retirement.

To be successful, a tax reformer has to find money to give away — he has to see where waste can be eliminated from the public accounts, where programmes can be scrapped, activities hived off, staff reduced. The more money that can be saved, the more likely tax reform will prosper, and the fewer losers you will create.

Tax reformers also need to think about fairness. It is difficult to benefit people at the lower end of the income scale through tax cuts, because Gordon Brown has introduced so many means-tested benefits and tax credits. Almost as fast as you cut the tax of someone on £15,000 a year, they lose means-tested benefits and credits. Anyone wanting a flat tax has to tackle the tax credit merry-go-round to ensure more of the benefit of a tax cut goes to people in receipt of benefits.

In the 1980s the Conservative Government undertook a major reform of taxation. We removed many allowances from corporation tax to cut the overall rate. We reduced the top rate of income tax from 83 per cent to 40 per cent and cut the standard rate to 23 per cent.

In the case of business taxes it was a flat-tax model. In the case of income tax it was substantially flatter taxes but short of a uniform flat tax rate. The scheme was attacked for benefiting people on higher incomes more than those on lower incomes. But we showed that the richest paid more of our total tax when the rates were lower, because more of them keep their income and assets onshore, and fewer found it worthwhile to set out complex tax-reduction regimes.

It helped to give the UK a competitive edge. More investment came to the UK than elsewhere in the European Union and more high earners wanted to come here or stay here.

Today, we need to do better because our competitors are doing better on tax than we are. The first task is to simplify the tax credits system. We should substitute tax cuts for tax credits so that people are better off without the handling charge for the Government to collect money with one hand and redistribute it with the other.

The second task is to reduce public spending. The expansion of the civil service needs to be halted and in some cases rolled back. It would be easy to cut the national civil service by 80,000 through natural wastage and to achieve more in local government by reducing its functions and abolishing the comprehensive performance and best value regimes.

We need to cut layers of government, abolish local education authorities and strategic health authorities, and reduce the volume of regulation and the army of regulators. This will give us scope to spend on tax reductions.

This would enable us to introduce flatter taxes. This process could bring us down to a standard tax rate of 20 per cent, with a top rate of 30 per cent.

I would also abolish capital gains tax, and tax short-term gains as income.

The excitement at the flat tax idea will sour if it is not handled well. Pension funds have suffered from Mr Brown’s tax impositions — it would be a brave chancellor who removed the remaining tax breaks. Abolishing savings reliefs — including taking away the tax-free status of national savings and premium bonds — would send a perverse message when we need to save more.

That is why I would start with a radical overhaul of government. Getting that into shape, along with a target-free diet, would enable us to move to a 20-30 tax system — much flatter and lower, and competitive. Revenues will then go up as more successful people and businesses flourish and pay extra tax. Then we could see if there is any appetite and enough money to go the whole way to a lower single rate with no reliefs at all.

The author is Shadow Secretary of State for Regulation