Flat Tax Progress in January-February 2009

Panama

2009 is getting off to an auspicious start. Ricardo Martinelli, the head of Panama’s leading opposition party plans to implement a flat tax if he is elected president in the upcoming May 3, 2009, election. His party has stated it wants to cut the top 27% tax rate on individuals to a flat rate of 15%, or perhaps an even lower 10%. In exchange for broadening the tax base by eliminating incentives for specific sectors, the current statutory 30% corporate tax rate could also be cut to 15% or 10%.

In January 2009 Martinelli joined forces with Juan Carlos Varela and the Panameñista Party; Varela is running as Martinelli’s vice-presidential candidate. Balbina Herrera, their opponent in the ruling Revolutionary Democrat Party, opposes the flat tax on the grounds that it would eliminate the country’s multiple-rate progressive system. Polling data in February 2009 show Martinelli with 53% support, up from 44.3% in January.

United Kingdom

In late January 2009, Conservative Party leader David Cameron spoke about his vision for the United Kingdom at Demos (a Blairite think tank). If the Conservatives win the next national election that must be held by 2010, Cameron will become prime minister. During the question and answer period, he stated that flat rates of tax are more progressive than graduated rates, basing his belief on the experience of those Central and Eastern European countries which adopted the flat tax in the past 15 years. Apart from their gains in revenue and improved economic conditions which accompanied the switch to the flat tax, its enactment in Britain would also eliminate all the hassles to businesses and individuals due to excessively complicated tax laws.

Oklahoma

On February 17, 2009, by a 9-6 vote, Oklahoma’s Senate Finance Committee passed a flat tax bill that would set the rate at 3.423% for all income brackets. If enacted, it would replace the current graduated rate system that taxes income over $10,000 at 7%. In exchange for the lower flat rate, the bill would broaden the tax base by reducing several deductions.

A Bold Fresh Flat Tax Proposal for New Zealand

On February 10, 2009, former finance minister and current finance spokesman for the ACT political party in New Zealand, Sir Roger Douglas, introduced a bold fresh flat tax plan. Sir Roger is a former Labor Party member known for his free-market, low-tax “Rogernomics” policies during the 1980s. Speaking to the Rotary Club of Orewa, he termed his plan a means to achieve a low-tax welfare state by redesigning the tax system in concert with the social welfare system.

Seven political parties occupy 122 seats in New Zealand’s Parliament. ACT holds 5. Along with 5 from the Maori Party, ACT has a confidence arrangement with the current government-led National Party of 58 seats, giving the latter a coalition majority of 68 seats.

Under Sir Roger’s plan, individuals would have the choice to continue to pay taxes and receive benefits in accordance with New Zealand’s current tax system and monopoly-run health, welfare, and retirement services. Or, they could opt in to a new system that works as follows.

An individual’s first NZ$30,000 would be tax free. Above that tax-free threshold, individuals would pay a flat-rate tax, to be reduced over the next 15 years along with the corporate tax, to 15%. The tax-free threshold would be increased to keep pace with inflation, and the threshold would rise with the number of children. Those earning below the threshold would receive a tax credit (cash) to boost their income up to the threshold.

The current personal income tax consists of five rates, 13.9% on the first NZ$14,000 of taxable income, 22.4% between NZ$14,000-40,000, 34.4% between NZ$40,000-70,000, 40.4% above NZ$70,000, and 46.4% for those who fail to complete a declaration form. These rates include a charge of 1.4%, an earners’ levy rate, to cover non-work related injuries. Self-employed individuals are subject to the same rate as employees. Companies pay a standard 30% profits tax. The goods and services tax, a value-added tax, would continue at 12.5%, along with excises on alcoholic beverages, tobacco products, and fuel.

In return for being taxed at a low flat rate, individuals will be required to contribute to a dedicated retirement plan in their own names. For health care, individuals and families will be required to purchase catastrophic health insurance, and risk coverage against injury, sickness, or job loss. The purposes of the plan are to improve incentives to work, save, and invest, while reducing dependence on the government for social services.

The Flat Tax at Work in Albania: Year One

Beginning January 1, 2008, Albania implemented a 10% flat tax on corporate and personal income. The 10% personal rate replaced five rates that peaked at 30% while the 10% corporate rate was halved from the previous 20% rate. Despite the reduction in rates, total revenues increased from LEK 125 billion in 2007 to LEK 148 billion in 2008, an increase of 18.4%. ($1.00 = LEK 96.71). With inflation a modest 3% in 2008, real inflated-adjusted revenue rose 15.2%.

One other development in the flat tax world is worth noting. On January 1, 2009, Latvia’s personal income tax rate fell from 25% to 23%.

2008 Flat Tax Wrap-Up

A flat tax on individuals (households) and, in some instances, the same flat-rate on individuals and corporations, has spread throughout most of Central and Eastern Europe. The remaining holdouts in alphabetical order, along with their tax-rate schedules, are as follows:

Croatia: 15, 25, 35, 45%
Hungary: 18, 36, 40%
Kosovo: 5, 10, 20%
Moldova: 7, 10, 22%
Poland: 19, 30, 40%
Republika Srpska (Serb-ruled portion of Bosnia and Herzegovina): 10, 15%
Slovenia: 16, 27, 41%

Croatia and Slovenia have steadfastly resisted any movement to a flat tax. Croatia has stuck to a tax-incentive approach for particular investments in specified locations. Slovenia regards itself as a member country of Western Europe, which requires that it maintain a schedule of steeply-graduated rates.

Serious movement towards a flat tax has yet to occur in Hungary and Moldova.

In Poland the governing coalition under the leadership of Prime Minister Donald Tusk favors a flat tax, but the leading opposition party holds the office of president with the power to veto legislation. If and when Tusk’s party wins control of both parliament and the presidency, Poland will be poised to adopt a 19% flat tax on individuals to complement its 19% corporate tax.

Kosovo is a brand-new Muslim country with a large concentration of Catholic Serbs in the upper 10% of the country bordering Serbia. Its immediate neighbor on its southwest border, Muslim Albania, adopted a flat tax in mid-2007. In this regard, the prospects for Kosovo following suit in the near future appear promising.

Republika Srpska has only to eliminate its 15% rate to attain parity with the 10% flat tax adopted in the Federation of Bosnia and Herzegovina in 2008.


Other Flat Tax Potpourri

The province of New Brunswick in Eastern Canada has been debating the merits of a flat tax for several months. A bi-party committee concluded its examination of the tax issue in mid-November 2008. The committee’s recommendation was for a provincial flat tax of 10% to rival that of Alberta. In addition, it was suggested that the corporate rate be cut from 13% to 5%. Any lost revenue is to be made up from a rise in the harmonized sales tax from 13% to 15%.

In late November, Dutch Minister of Finance Wouter Bos stated that he was not opposed to a flat tax of 37% that would replace the current four-bracket set of rates that peaks at 52%.

Expatriates in Korea can choose the lower of two personal income tax calculations. One imposes a 17% flat tax that excludes deductions and credits. The other treats 70% of gross income as taxable, exempting 30% from formal earned income and then allows for certain deductions and credits. Domestic Korean employees are subject to a four-bracket schedule with a top rate of 34% in 2009.

The Swiss Canton of Thurgau is poised to vote on a cantonal flat tax in September 2009. The odds are favorable that it will become the third Swiss Canton to replace graduated income taxes with a flat tax.

Why the U.S. Federal Income tax is so Hard to Reform

Since President Reagan’s 1986 tax legislation, which broadened the tax base and lowered tax rates, every subsequent proposal to reform the federal income tax has come to naught. Indeed, the length and complexity of the code continue to grow topsy. Every group that benefits from a new provision becomes another political constituency for keeping and expanding it.

Several proposals for heath care reform, if enacted, would create another large interest group that will hamper future efforts at tax reform. Under current law, employer-provided health insurance to employees is not subject to individual taxation, whereas those who buy insurance on their own must pay for it out of after-tax income. One proposal suggests leveling the playing field by eliminating the exemption for employer-provided insurance, but its authors argue that eliminating that benefit would face enormous political opposition. Accordingly, they recommend that individual purchasers of insurance receive a tax deduction. On its face, this seems fair, and would likely extend coverage to some currently uninsured. The problem is that this new tax benefit, like so many before it, would further make the federal income tax impervious to comprehensive reform.

The same applies to special tax benefits for education, energy, green technology, housing, and so on. Why is that some, but not other, endeavors are to be encouraged and rewarded with tax benefits? Why not give the entire economy the benefit of lower rates?

The way to reform the tax code is to broaden the base and lower the rates (preferably to a low flat rate). Advocating new deductions and/or credits only makes it more difficult.

The Flat Tax Spreads to the Federation of Bosnia and Herzegovina (FBiH) within Bosnia and Herzegovina (BiH)

By Alvin Rabushka


The Dayton Agreement of 1995 ended the war between Serbs, Muslims, and Croats in what was the former Yugoslav territory of Bosnia and Herzegovina (BiH). Two separate entities were initially established within BiH: the Federation of Bosnia and Herzegovina (FBih), also known as the Bosniak-Croat entity, and Republika Srpska (RS). A third entity was subsequently established, the Brčko District (BD), which is a small community of about 80,000 inhabitants, of whom 40% are Bosniaks (Muslims), 49% Bosnian Serbs, and 11% Bosnian Croats. (According to the Dayton Peace Accords, an arbitration process could only determine the disputed portion of the Inter-Entity Boundary Line.) Brčko continues to be a disputed, multi-ethnic town, subject to its own laws and those of FbiH.

Separate tax systems were established in each of the three entities. The BD assembly passed a new law on income tax in the middle of 2003, to take effect at the beginning of 2004. The law eliminated double taxation of interest and dividends, exempted capital gains, and imposed a uniform 10% flat tax on salaries, incomes, and profit of corporations. Each employee receives a personal allowance of BAM 240 and an additional BAM 120 for each dependent per month. ($1 = BAM 1.47 as of December 11, 2008. BAM stands for Convertible Marka.)

The FBiH encompasses 11 Cantons, including Sarajevo. In the second week of 2008, the FBiH House of Representatives adopted a new income tax to take effect on January 1, 2009. The House abandoned the initial idea of a two-rate system of 10% and 15% in favor of a flat rate of 10%. The new law replaces a cantonal based income tax that ranged between 5-30% depending on cantonal regulations and different types of income. A personal allowance exempts the first BAM 3,600 a year from income tax. Additional fractional allowances are permitted for a dependent spouse, dependent children, other dependent immediate family members, and for disability of immediate family members. Dividends, prizes, pensions, and child allowances are exempt.

The income tax in Serb-dominated RS imposes two rates: 10% between taxable income BAM 2,460-25,008 and 15% on taxable income above that.

The Flat Tax Spreads to Belarus

November 30, 2008

By Alvin Rabushka


Effective January 1, 2009, Belarus will replace its five-bracket personal income tax (PIT) with a flat-rate tax of 12%. The current PIT imposes a marginal tax rate of 9% on annual aggregate taxable income up to BYR 3,402,000. Thereafter, the rates are 15% between BYR 3,402,001-8,505,000, 20% between BYR 8,505,001-11,907,000, 25% between BYR 11,9077,001-15,309,000, and 30% over BYR 15,309,001. ($1=BYR 2,142 as of November 28, 2008. The Belarus ruble has remained in a narrow trading range of $1=BYR 2,142-2,160 during 2004-8.) Taxpayers are allowed a basic deduction for themselves and their children up to the age of 18. Under existing law, dividends are taxed at 15% and royalties at 40% while interest and capital gains are tax-free. Further details of the new Belarus 12% flat tax will be posted here as they become available.

Belarus selected a flat rate of 12% to be 1% less than Russia’s 13% flat tax.

The corporate profits tax remains at 24% and value added tax at 18%, both harmonized with Russia, with whom Belarus has single-market arrangements.