Flat Tax

Book Citations: Flat Tax vs. Progressive Tax

2012-01-18T01:15:00.000-08:00

Google's ngram viewer allows a comparison of the frequency among two or words or phrases between selected years.

The following graph plots the frequency of "flat tax" vs. "progressive tax" during 1960-2008. (Click on link) It shows that "flat tax" took off around 1980 with the publication of the Hall-Rabushka plan that was the basis for many of the flat-tax bills proposed in Congress during 1982-86. It faded somewhat after passage of the Tax Reform Act of 1986, which resulted in two rates of 15% and 28%.

The frequency of the words "flat tax" accelerated again in the early 1990s with proposals from House Majority Leader Dick Armey and Republican presidential candidate Steve Forbes. The early 1990s also witnessed first wave of flat-tax legislation in the Baltic states of Estonia, Latvia, and Lithuania.

Its frequency in books declined again after 1998, but remains comfortably ahead of "progressive tax" through 2008, the latest year for which Google books data has been compiled.

Flat Tax Roundup 2011

2011-12-31T01:00:00.000-08:00

No major flat tax developments transpired in 2011, either in new countries getting on the bandwagon or existing flat-tax countries falling off.

Vietnam has joined the list of countries-- Malta (15%), Andorra (10%), Malaysia (15%)--that tax non-residents at a flat rate, set at 20%, while residents pay graduated rates up to 35%.

The big news is the revival of the flat tax in the campaign for the Republican presidential nomination. Herman Cain (since withdrawn), Rick Perry, and Newt Gingrich have explicitly proposed a flat tax. If either Perry or Gingrich win the nomination, the flat tax will be a major issue throughout the campaign. Although Jon Huntsman signed a flat tax into law in Utah, he proposes three federal income tax rates. Mitt Romney plans to lower rates in the future, but is not proposing an immediate major reform. Michele Bachmann, Rick Santorum, and Ron Paul support reform and lower rates, but none of these seem likely to secure the nomination.

Malta Extends its Preferential 15% Flat Tax

2011-11-17T09:52:00.000-08:00

To enhance Malta’s attractiveness for skilled persons engaged in certain high-tech economic fields, the government, in its 2012 budget, has extended its preferential 15% flat tax to international professionals developing digital games. Maltese companies that commission digital games will qualify for a tax credit of about $20,000.

The government will also exempt royalties from copyright-protected books, film scripts, music, and art.

Return With Us to Those Exciting Days of Yesteryear

2011-10-24T10:57:00.000-07:00

The Flat Tax Rides Again--Perry, Huntsman, Gingrich (optional), Cain, and Bachman.

Et tu Romney?

Three Cheers for Herman Cain

2011-09-25T07:00:00.000-07:00

9-9-9

Madagascar Enhances its Flat Tax

2011-06-15T10:13:00.000-07:00

To improve the investment climate in the African island nation of Madagascar, located off the southeast coast of the African continent, the government’s 2010 budget reduced the flat-rate personal income tax from 24% to 23%, with a personal allowance of MGA 250,000 (US$1 = Malagasy Ariary 1,942), about $125 per month, or $1,500 a year. Corporation tax was incorporated into the income tax code at the same 23% rate.

Flat Taxes Blog Highly Ranked in British Isles

2011-05-09T10:52:00.000-07:00

This blog is ranked #28 in Economy blogs in the United Kingdom and Irish blogospheres. Thanks to all you British and Irish readers who find it of interest.

Andorra Implements Non-Residents 10% Flat Tax

2011-04-28T12:22:00.000-07:00

Andorra historically had no income or capital gains taxes on residents and non-residents. In 2007, to slow property inflation, the government levied a 15% capital gains tax.

In late December 2010, Andorra published the Taxation of Non-Residents Act, 2010. It subjects non-resident companies and individuals to a 10% flat tax on local-source profits and income, minus permitted expenses and deductions. It plans to reduce capital gains tax on property from 15% to 10% in the near future.

The government plans on introducing a value-added tax to replace the existing consumption tax. Following the imposition of a 5% VAT, the government next intends to apply the 10% flat tax to resident companies and individuals.

Malta Implements Non-Resident 15% Flat Tax

2011-04-26T11:29:00.000-07:00

The publication of Legal Notice 106 - Highly Qualified Persons Rules - implemented a 15% flat tax for non-residents, effective January 1, 2010 (assessed in 2011) in specific eligible offices of employment in Malta for an initial period of five years.

The regulation lists categories of eligible positions and qualifying employment conditions. The 15% flat rate does not apply to resident Maltese.

To benefit from the 15% flat rate, a qualified employee must earn income of at least €75,000, which is to be adjusted annually in line with the Retail Price Index. A particular attractive feature of the scheme is that excess income over €5,000,000 is free of tax.

The Flat Tax is Alive and Well

2011-04-18T01:19:00.000-07:00

Today, April 18, 2011, is the federal income tax filing deadline for 2011. Sad to say, there is no simple postcard-size flat tax in our immediate future. A flat tax is not in the cards anytime soon in North America or old Europe.

Elsewhere the flat tax thrives. The IMF uses every tool at its disposal to persuade countries to abandon the flat tax to close budget deficits or improve their definition of fairness. These entreaties continue to be rejected. Commentators who smell any weakening of commitment to the flat tax are quick to rush into print, wrongly in every case, to proclaim the beginning of the movement to dismantle the flat tax.

I hope to report this year new entrants into the flat tax club. Stay tuned!

Malaysia Promotes Preferential 15% Flat Tax

2011-04-13T11:57:00.000-07:00

On April 12, 2011, Prime Minister Datuk Seri Najib Tun Razak announced that Malaysia would encourage Malaysian professionals working abroad to return home by making them eligible for a 15% flat-rate income tax for five years, competitive with Hong Kong and below the maximum 26% rate under current law.

Once in place, the government will likely face pressure to extend the 15% flat rate to Malaysian professionals working at home, and then to all Malaysians.

(Here’s hoping!)

Why the U.S. Needs a Flat Tax

2011-04-11T12:49:00.000-07:00

You want another good reason for a simple, postcard-size flat tax in the United States. Take a look at the growth of tax law.

(HT: Dontmesswithtaxes.com)

Flat Tax Book Available in German, French, and Spanish

2011-02-13T10:14:00.000-08:00

For those of you who would like to read The Flat Tax book in German, French, or Spanish, you can download a copy free of charge from the E-book page of the web site of the European Center of Austrian Economics Foundation, located in Liechtenstein.

I recommend that you browse the other pages of the ECAEF web site where you may find items of interest. I will be speaking at a conference in Vaduz on May 20, 2011, on "The Economics of Regulations."

Newly Independent Southern Sudan Joins the Flat Tax Club of Nations

2011-01-18T02:46:00.000-08:00

During January 9-15, 2011, qualified voters of the Southern Sudan Referendum overwhelmingly voted for independence.

Sudan became independent on January 1, 1956. During 1956-2002, two lengthy civil wars were fought, largely between the Arabic Muslim north and the Christian African tribal south. More than 2.5 million people were killed and another 5 million displaced. A final peace agreement was reached on January 9, 2005. A new constitution for Sudan was ratified in July 2005. It provided for a referendum to be held in January 2011 that allows the Southern Sudan to secede if it wishes.

English: Map showing political regions of Sudan as of July 2006.

Darfur

Nuba Mountains and Blue Nile

North Sudan

South Sudan

Eastern Front, area of operations July 2006

Abyei, as defined by the Permanent Court of Arbitration

(Credit: Lokal_Profil, Wikipedia)

During 2005-2011, the Interim Constitution of the Southern Sudan was the supreme law for the South. GOSS is the acronym for the Government of Southern Sudan.

In accordance with the provisions of Article 59(2)(b) and Article 85(1) of the Interim Constitution, the Southern Sudan Legislative Assembly enacted the Personal Income Tax Act, 2007. The law established a tax-exempt threshold of SDG 300 (three hundred Sudanese Pounds) per month. (US$1.00 = SDG 2.50) Above that all taxable income is charged at a flat rate of 10%.

The Southern Sudan has had a flat 10% personal income tax since 2007. With passage of the referendum, Sudan joins the ranks of independent countries with a flat tax.

The Sudanese government in Khartoum has a slightly graduated tax system of three rates: 5%, 10%, and 15% (see Appendix IV, page 42). The personal income tax exempts the first SDG 9,050 from taxation. Thereafter, successive rates of 5% and 10% are levied on the next SDG 120 and SDG 240 respectively, after which a fixed rate of 15% is applied. The combined SDG 360 of the two lower rates amounts to about 4% of the value of the tax-free threshold of SDG 9,050. The number of salaried persons falling into those two intermediate brackets is likely to be a trivial fraction of total salaried personnel. In that regard, Sudan has a Hong Kong-style flat tax of 15%.

Armenia Moves Within a Hair of a Flat Tax

2011-01-01T07:00:00.000-08:00

On June 24, 2010, Armenia’s National Assembly reformed its tax code. Effective January 1, 2011, all exemptions and deductions are removed from the personal income tax. All income up to 120,000 drams (US$1.00=AMD 363.4) is taxed at 24.4%, with income above AMD 120,000 at 26%. Armenian commentators describe the reform as a practically one-rate (flat-rate) tax. The new “almost flat” tax replaces the previous regime of granting a deduction of AMD 30,000, 10% on taxable income up to AMD 80,000 and 20% above AMD 80,000. (The flat-rate profits tax increased from 20% to 26%.)

The rise in the personal income tax rate is offset as follows:

Elimination of the 3% social tax on employees.

Elimination of the sliding scale social tax on employers reaching 20% above AMD 100,000 per month.

Reduction in Value-added tax from 20% to 18%.

Bing Crosby Sings Out For The Flat Tax

2010-11-26T08:19:00.000-08:00

A new rendition of Bing Crosby’s famous song is available for this year’s holiday season.

I’m dreaming of a low flat tax

Just like the ones in Eastern Europe

Where the forms are simple

And the rates are low

And their economies flourish and grow.

I’m dreaming of a low flat tax

With every holiday card I write

May your days be merry and bright

And may all your taxes be flat and light.

Happy caroling.

Thanksgiving: Giving Thanks for the Flat Tax

2010-11-24T09:55:00.000-08:00

Romania: On November 22, 2010, Romania’s Senate adopted a draft law by a 54 to 31 vote to reduce the flat tax from its current 16% rate to 10%. Proposed by Economy Minister Ion Ariton, the bill was supported by opposition lawmakers. The argument in support of the 10% rate was that it would both generate growth and increase revenue.

If the larger Chamber of Deputies approves the rate reduction, it will become law.

As expected, the IMF urged Romania not to lower its flat rate to 10%, insisting that a rate cut would reduce revenue. Stay tuned!

Estonia: In a recent radio interview, Prime Minister Andrus Ansip defended the flat tax, rejecting a proposal by the opposition Center Party to switch to a graduated rate system. Ansip pointed out that Estonia has the lowest public debt in the EU, which could be paid off using reserve funds. In his view, the flat tax was instrumental in Estonia having the highest growth rate in the EU during the past decade.

Hungary: As previously blogged, Hungary joined the league of flat-tax members, enacting a 16% flat rate on personal income effective January 1, 2011.

For more information on these and other countries, check out Google Blog search and Google News on the flat tax.

Poland’s Finance Minister Talks Up Flat Tax

2010-11-14T12:30:00.000-08:00

Polish Market Online reported on November 12, 2010, that Finance Minister Jacek Rostowski told Dziennik Gazeta Prawna newspaper that he would eventually like to introduce a flat tax. to replace the country's current two rates of 18% and 32%. He gave no specific date. The objective would be to strengthen growth. and would place Poland in the same low, flat-rate competitive league with neighboring flat tax countries

Hungary Enacts a Flat Tax

2010-11-06T09:51:00.000-07:00

The Budapest Times issue of October 27, 2010, reported that Hungary’s Parliament approved the government’s proposal for a flat tax. Beginning January 1, 2011, personal income tax will be set at a flat rate of 16%. The 16% flat rate replaces the current two bracket system of 17% and 32%.

Turkey’s Opposition Party Advocates Flat Tax

2010-10-21T09:08:00.000-07:00

Kemal Kilicdaroglu, a 61-year old former accountant, was unanimously elected on May 22, 2010, as leader of the Republican People’s Party (CHP), the main opposition party in Turkey’s parliament.

The CHP was launched by Mustafa Kemal Ataturk, modern Turkey’s revered founder. In recent years, the party has fallen out of favor. Kilicdaroglu is trying to revive the party’s fortunes. Central to his vision is the flat tax, to simplify the tax system and lower the top tax rate to curtail the underground economy and tax evasion. It is estimated that half of Turkey’s work force is not registered in the tax net.

Current personal income tax rates range between 15% to 38%. Kilicdaroglu has not yet announced the choice of rate, but it is likely to be low, reflecting rates throughout Central and Eastern Europe’s flat-tax countries.

Flat Tax Stays on Track in Hungary

2010-10-19T10:46:00.000-07:00

On October 18, 2010, Hungary’s governing Fidesz party submitted its tax reform package to the country’s parliament.

Following through on its pledge to implement a flat tax, the package includes a 16% flat tax on all forms of personal income to take effect on January 1, 2011. It would replace the current two-rates of 17% on income up to HUF (Hungarian forints) 5 million and 32% on income beyond that. (US$1=HUF 201)

A flat-rate corporate income tax of 10% would take effect from 2013. Those firms whose tax base falls beneath HUF 500 million would enjoy the 10% rate from January 1, 2011. Companies with a higher tax base currently pay 19% profits tax.

The projected revenue reductions are to be offset with a financial “crisis” tax on telecommunications, energy suppliers, and retail chains. Hungarian Prime Minister Viktor Orban believes that the flat rate tax on individuals and business is necessary to improve the country’s competitive position in Europe.

Obama Plants the Seeds of The Flat Tax

2010-09-09T09:08:00.000-07:00

Speaking at Cayuhoga Community College in Parma, Ohio, on September 8, 2010, President Obama planted (perhaps inadvertently) the seeds of The Flat Tax.

The president called for full expensing (100% writeoff) of investment in plant and equipment for all U.S. businesses in 2011, thereby removing the current $250,000 limit in Section 179 of the U.S. tax code.

Obama’s 100% first-year writeoff leads, in a few steps, to The Flat Tax.

1. Make expensing permanent.

2. Apply the Alternative Minimum Tax (AMT) to all tax filers at a 19% rate. At the same time broaden the tax base by eliminating all deductions, exemptions, and credits except for a personal allowance.

3. Integrate the corporate income tax with the personal income tax at the same 19% rate. Eliminate double taxation of dividends, tax on capital gains, tax on estates, and deduction of interest.

Voila!

Flat Tax Countries and Jurisdictions September 2010

2010-09-01T03:00:00.000-07:00

The table that appears below is a [corrected] current list of countries and jurisdictions (some not internationally recognized) that have adopted a flat tax as of September 1, 2010, with the current rates. It replaces an earlier posting that contained some incorrect numbers and dates. [HT: Thanks Charlie]

I have been unable to find the year of implementation for Nagorno Karabakh and Abkhazia. I include Hungary based on the government's firm statement that a flat tax will begin on January 1, 2011. Detailed information about the specific countries appears in previous posts, including an explanation of Paraguay's inclusion.

Flat Tax Jurisdictions
Jurisdiction	Year of Implementation	Personal Tax Rate Percent	Corporate Tax Rate Percent
Jersey	1940	20	20
Hong Kong	1947	16	17.5
Guernsey	1960	20	0
Jamaica	1986	25	33.3
Tuvalu	1992	30	30
Estonia	1994	21	0
Lithuania	1994	15	15
Grenada	1994	30	30
Latvia	1995	26	15
Russia	2001	13	24
Serbia	2003	12	10
Iraq	2004	15	15
Slovakia	2004	19	19
Ukraine	2004	15	25
Georgia	2005	20	20
Romania	2005	16	16
Turkmenistan	2005	10	20
Trinidad & Tobago	2006	25	25
Kyrgyzstan	2006	10	10
Albania	2007	10	10
Macedonia	2007	10	10
Mongolia	2007	10	10,25
Montenegro	2007	9	9
Kazakhstan	2007	10	15
Pridnestrovie	2007	10	0
Mauritius	2007	15	15
Bulgaria	2008	10	10
Czech Republic	2008	15	19
Timor Leste	2008	10	10
FBiH	2009	10	10
Belarus	2009	12	24
Belize	2009	25	25
Nagorno Karabakh		5	5
Seychelles	2010	15	35
Paraguay	2010	10	10
Hungary	2011	16	10
Abkhazia		10	18

Grenada is an Established Member of the Flat Tax Club

2010-08-17T03:20:00.000-07:00

Fearful that the political leadership in Grenada was about to create a mini-Cuba in the Eastern Caribbean, the United States invaded the island in 1983 and restored the status quo ante government to power.

Grenada's current income tax system is based on the Income Tax Act 36/1994. It set a single rate of 30% on all income exceeding East Caribbean Dollars 60,000, about US$22,346. (US$1 = XCD 2.685) The rate and threshold apply to salaried persons, sole proprietors, and professionals. The 30% rate also applies to company profits.

There is no tax on capital gains or dividends.

Per capita income is in the neighborhood of US$6,200, which means that a substantial number of employed or self-employed of the Grenadian population (about 104,000) is not caught in the income tax net.

Amendments to Serbia’s Personal Income Tax

2010-08-16T03:00:00.000-07:00

Serbia first implemented its flat tax on personal income, set at 14%, in 2003 (the corporate rate was set at 10%, at which level it still remains). On March 23, 2010, the Serbian Parliament approved amendments to the Personal Income Tax Law. Details are as follows:

Individuals pay 12% on wages and salary income.

The capital gains tax is 10%, reduced from 20%.

The tax rate on income from dividends is 10%, reduced from 20%.

The tax rate on income from insurance is 10%, reduced from 20%.

The tax rate on a self-employed person is 10%, except a special rate of 15% is charged on self-employed income exceeding 6 times the average annual salary, after deducting exemptions. (Only the self-employed are subject to the 5% surcharge.) Salaried and self-employed receive an exemption on all income up to 3 times the average annual salary.

The 10% tax rate applies to income up to Serbian Dinars 3,288,528. (US$1 = SRD 80.98) Thus the 15% rate only takes effect on annual income exceeding $54,148. Average gross annual salary is $6,620.40. Only a very small portion of the population, and even among the self-employed, pay the surcharge.

Resident foreign nationals and Serbian citizens are subject to the same rates and enjoy the same exemptions.

The Republic of Abkhazia Maintains a Flat Tax

2010-08-13T03:20:00.000-07:00

Abkhazia is an internationally unrecognized state but which has enjoyed a form of de facto independence since 1993. Its history can be read here and here.

Abkhazia has an independent tax system. Its main components are personal income tax, company profits tax, value added tax, and payroll tax. The Russian text can be read here and the English text here.

Personal income tax is charged at a rate of 10%.

Business profits tax is charged at 18%.

Value added tax is set at 10%.

Social insurance tax is set at 20% of payroll.

[Note: I have been unable to find publicly available information on details of the several federal taxes, e.g., deductions, exemptions, credits, etc., nor explicit details of local taxes. I will post this information as it becomes available.]

Paraguay Adopts a 10% Flat Tax

2010-08-12T03:00:00.000-07:00

Until 2010 Paraguay did not tax personal income. The government relied on value added tax, excises, company profits tax, and international trade taxes for its revenue.

To diversify its revenue base, effective January 1, 2010, Paraguay enacted a flat-rate personal income tax (PIT). It set the rate at 10% for 2010. The tax-free threshold is set at 120 times the minimum monthly wage (MMW is about US$ 268 in 2010). This puts the annual tax-free threshold at $21,000.

Estimates of the distribution of income in Paraguay indicate that the top tenth of the population receives about 47% of the national income. Average per capita income for the top tenth is about $12,000, which means that most individuals in the top tenth are not captured in the income tax net.

The personal income tax law broadens the base through 2017 by reducing the tax-free threshold each year by 12 times the MMW. The threshold falls to 108 MMW in 2011, then 96 MMW, 84 MMW, 72 MMW, 60 MMW, 48 MMW, reaching 36 MMW in 2017. In addition, the flat rate falls from 10% to 8% in 2011, where it remains through 2017.

The PIT allows deductions for contributions to the state social security system, up to 20% of income for charitable gifts, expenses related to producing income, deposits in banks, credit institutions, and investments joint-stock companies. Exemptions are provided for retirement annuities, interest income, and several other items.

There is one modest adjustment to the flat tax that will affect no more than 1-2% of taxpayers. During 2011-17, a 2% surtax will apply to individuals whose income exceeds 120 MMW. Despite this provision, I include Paraguay in the roster of flat-tax countries. The small number of persons subject to the 10% rate, after allowing for legitimate deductions and exemptions, constitutes a minuscule part of the income-taxpaying population.

Addendum

KPMG 2009 list of global tax rates which states that Paraguay had a flat tax since 2007 is wrong. A first-hand account from Ascunsion can be read here. Other articles stating 2010 as the starting date can be read here and here.

Flat Tax Countries Flag Display

2010-08-10T12:58:00.000-07:00

The number of flat tax countries and political jurisdictions now stands at 37, of which only 3 predate the publication of the Hall-Rabushka flat-tax plan that was first published in the Wall Street Journal on December 10, 1981. The full plan appears in our book The Flat Tax. The photo that appears below is my flag collection of flat-tax countries and jurisdictions save a few that I have been unable to locate in stick form.

Four More Flat Tax Jurisdictions

2010-08-04T03:00:00.000-07:00

I previously posted on March 10, 2010, the chronology of countries and non-internationally recognized, but effectively self-governing, jurisdictions that have adopted a variation of the flat tax on personal income or both personal and corporate income. The most recent post of July 16 added the Seychelles to the list.

A careful search found four more flat tax jurisdictions. In alphabetical order they are Guyana, the Nagorno Karabakh Republic (a disputed territory within Azerbaijan but effectively self-governing and closely linked with Armenia), the Democratic Republic of Timor Leste, and the Pacific Island nation of Tuvalu.

1. Guyana: Guyana taxes individuals at a flat rate of 33.3% on income exceeding Guyana dollars 420,000 per annum. (US$1 = 205.45 GYD) Capital gains are taxed as ordinary income. Corporations are taxed separately at 45% if a commercial firm and 35% if a non-commercial firm. (I regard any rate above 30% as too high because high rates encourage avoidance and evasion.)

2. Nagorno Karabakh Republic: Located within the boundary of Azerbaijan, the self-governing jurisdiction, although not internationally recognized, has lowered its rate of tax to 5% on both personal and business income. The government is keen to attract investment and reduce tax evasion by encouraging those in the shadow economy to surface.

3. Timor Leste (the former East Timor was decolonized in 1975 by Portugal and secured its independence from Indonesia in 2002): Effective January 1, 2008, the government of Timor Leste imposed a flat tax of 10% on monthly taxable wages exceeding $500. (Timor Leste uses the U.S. dollar as its official currency.) The 10% rate also applies to royalties, rent, and income from prizes and lotteries. A resident business enterprise is taxed at 10% on income exceeding $6,000. A non-resident individual business enterprise is taxed at 10%, the same as a non-individual business enterprise. The rate for the previous six years (2002-07) was 30% on the latter two.

4. Tuvalu: The Pacific Ocean country of Tuvalu has been independent since 1978. Personal income tax is charged at a flat rate of 30% with a tax-free threshold of the Australian dollar equivalent of US$2,220. Corporate tax rates on all taxable income are also set at 30%. Non-resident individuals are charged 40%.

The Flat Tax Spreads to The Seychelles

2010-07-16T09:11:00.000-07:00

With the assistance of the International Monetary Fund and other tax experts, the Republic of Seychelles (a small island nation 832 miles east of mainland Africa, northeast of Madagascar, with a population of about 84,000) completed a major tax reform that includes a broad-based flat tax. In the 2010 budget, Minister of Finance Danny Faure spelled out the details.

January 1, 2010: A 15% withholding rate will be applied to dividends and interest income.

July 1, 2010: A personal income tax (PIT) will replace former Social Security fund contributions amounting to 22.5% of wages with a flat-rate tax of 18.75%. Expatriates will be subject to the PIT at an initial rate of 10%. Rebates will be given to those with the lowest incomes in the country below a PIT threshold.

January 1, 2011: The PIT rate will be reduced to 15%.

January 1, 2012: The expatriate PIT rate will rise to 15% to be harmonized with that of residents.

On January 1, 2010, the tax reform also lowered the top rate of tax on corporations, partnerships, and sole traders from 40% to 33% on income exceeding Seychelles Rupees 1,000,000 (US$1 = SCR 12.5), with a lower rate of 18.75% applied to income beyond a tax-free threshold over SCR 250,000 up to SCR 1,000,000.

Flat Tax Alert: Hall Goes Wobbly

2010-06-17T07:00:00.000-07:00

The Federal Reserve Bank of Minneapolis, in its June 2010 edition of Region magazine, published a lengthy interview with Robert E. Hall that covers a broad range of economic issues. One discusses tax policy. As most readers of this site know, Bob is my coauthor of four books (1983, 1985, 1995, 2007) and numerous articles on the flat tax.

Bob stated that “it wouldn’t be remotely practical to do it [tax reform] with a single positive tax rate now.” This is due, in his view, to the dramatic widening of the income distribution in the U.S. since 1981. “This means that the idea of the poor paying the same tax rate just seems less viable than it was when the income distribution was tighter.”

....”So I play around with systems that have, say, two brackets.”

The Tax Reform Act of 1986, signed into law by President Reagan, had two brackets of 15% and 28%. In 1991, President George H.W. Bush signed legislation that added a 31% bracket. In 1993, President Clinton followed with two higher brackets of 36% and 39.6%. Two brackets lasted just five years. Moreover, the administrative simplicity of the Hall-Rabushka flat tax quickly evaporates with the addition of a second or more rates.

I also need to restate the historical record of our joint work. Bob stated that “The origin of our initial flat tax effort was Rabushka coming to me in 1980 and saying, ‘I know what the people want. The people want a flat tax, but I don’t quite know what that is.’ And I said ‘I know what it is because I’ve been thinking about it since I was a graduate student.’”

Bob’s account is wrong. I had been observing Hong Kong’s approximate flat tax since 1973 and had looked at other cases in the Channel Islands of Jersey and Guernsey. I was asked to serve on President Reagan’s Tax Policy Task Force, which met between his nomination in August 1980 and election in November 1980. Having been dissatisfied with our 400-plus page report, I published a brief article in the March 25, 1981, edition of the Wall Street Journal entitled “The Attractions of a Flat-Rate Tax System.” Until that point, I had no knowledge that Bob had ever thought about the subject. Bob came to me and suggested that we write a flat-tax plan to replace the then current U.S. federal personal and corporate income taxes, which we did over the summer of 1981. We went public with the plan in the December 10, 1981, edition of the Wall Street Journal, entitled “A Proposal to Simplify Our Tax System.”

One other quibble is with his comment that the flat tax has not gone very far in the rest of the world. The dozens of postings on this site indicate otherwise.

Bob has not yet formally disassociated himself from the H-R flat tax. However, he has been less outspoken in its support in recent years. As president of the American Economic Association in 2010, I worry that this may be the year he walks himself back from the flat tax, explicitly stating a preference for a multi- bracket federal income tax.

The Flat Tax Percolates in Hungary

2010-06-11T07:00:00.000-07:00

The selection of Viktor Orbán as prime minister, following his electoral victory with a two-thirds majority of his Fidesz Party in the final round of parliamentary elections on April 25, 2010, signals a new direction in Hungarian economic policy. After three days of meetings with his cabinet, Orbán presented a multi-point plan to parliament to address Hungary’s economic crisis, which consists of spending cuts and pro-growth tax reform.

As of this writing, the plan calls for a 16% flat rate tax on personal income, to replace the current two brackets of 17% and 32%. The rate was selected following an examination of flat-tax neighboring countries. (In mid-May, the prime minister’s office ordered a dozen copies of the German edition of “The Flat Tax.” Evidently the book reinforced Orbán’s predisposition for a flat tax.)

Enacting a flat tax on personal income would, according to the minister of national economy, enable the government to phase out 58 separate taxes, and underpin the government’s plan to reduce the burden of taxes on the economy. This blog will post details as they become available and the likely date of implementation.

On a related note, ground has been broken in Ireland for a discussion of a flat tax. Dr. Constantin Gurdgiev of Trinity College, speaking at the annual conference of the Institute of Certified Public Accountants in Maynooth on June 3, 2010, urged Ireland to adopt a 20% flat rate of income tax, replacing the current two brackets of 20% and 41%. Doing so would close the “welfare trap,” enhance Ireland’s competitiveness for foreign investment, and support its growing knowledge economy that requires highly-skilled people who are sensitive to tax rates.

A Selective Flat Tax in Malta

2010-04-08T12:34:00.000-07:00

The Times of Malta (April 7, 2010) reported that the Maltese Finance Ministry was finalizing plans to introduce a 15 percent flat tax to attract foreign experts who work on a temporary basis in high-income jobs. Malta is a small island nation that lacks some skills to compete effectively in the global arena in specialized areas.

The article attracted several dozen comments. Some suggested that the low, flat-tax incentive offered to skilled foreigners might also apply to resident Maltese, which would encourage the acquisition of advanced skills and concurrently reduce tax evasion attributable to the current three-bracket income tax regime of 15, 25, and 35 percent.

How to Simplify the Federal Income Tax

2010-04-04T08:26:00.000-07:00

A simple explanation, live and in color, showing the simplicity and benefits of the flat tax.

Iceland Abandons the Flat Tax

2010-03-16T08:29:00.000-07:00

In the wake of its financial and economic crisis, Iceland modified its personal income tax.

Effective January 1, 2010, Iceland replaced its 35.7% flat-rate personal income tax (combined national and municipal) with three national rates: 24.1% on income up to ISK (Iceland Krona) 2,400,000; 27% on income between ISK 2,400,001 and ISK 7,800,000; and 33% on income exceeding ISK 7,800,001 (US$1=ISK 126.2). The additional municipal tax on these brackets ranges between 11.24% and 13.28% , putting the top personal rate at 46.28%.

It should be noted that Iceland’s flat-tax rate was the highest in the list of flat tax countries, some 10.7 percentage points above the next highest rate of 25%.

The corporate tax rate remains a flat 18%.

Joseph, Pharaoh, and a 20 Percent Flat Tax in Egypt

2010-03-11T10:07:00.000-08:00

Biblical scholars place the story of Joseph and the famine, recounted in Genesis 41 and 47, in the Second Intermediate Period (1674-1553 B.C.). Joseph, endowed with the ability to interpret dreams, advised Pharaoh that his two dreams of seven lean ears of corn devouring seven good ears and seven lean cows arising from the Nile eating the seven fat cows which preceded them meant that Egypt would enjoy seven good years of harvests followed by seven bad years.

To prevent this disaster and possible destruction of Egypt, Pharaoh appointed Joseph to supervise the collection of a fifth of the grain output in the seven plentiful years and store it for subsequent distribution and sale in the seven lean years. Sure enough, Pharaoh’s dream came true, but the storehouses of grain saved Egyptians and their neighbors from starvation.

From this episode, Joseph established as law the principle that a fifth of the produce grown in the land of Egypt belongs to Pharaoh. This principle was reestablished in July 2005 when a new code slashed the top personal rate from 32 to 20 percent (with two lower rates of 10 and 15 percent) and set the corporate rate at 20 percent.

Flat Tax Chronology

2010-03-10T08:54:00.000-08:00

A chronology of countries that have adopted a flat tax, indicating the year of adoption, the personal income tax rate, and the corporate income tax rate appears below.

Flat Tax Jurisdictions
Jurisdiction	Year of Implementation	Personal Tax Rate Percent	Corporate Tax Rate Percent
Jersey	1940	20	20
Hong Kong	1947	16	17.5
Guernsey	1960	20	0
Jamaica	1986	25	33.3
Estonia	1994	21	0
Latvia	1995	25	15
Lithuania	1996	24	15
Russia	2001	13	24
Serbia	2003	14	10
Iraq	2004	15	15
Slovakia	2004	19	19
Ukraine	2004	15	25
Georgia	2005	12	20
Romania	2005	16	16
Turkmenistan	2005	10	20
Trinidad & Tobago	2006	25	25
Kyrgyzstan	2006	10	10
Albania	2007	10	20
Iceland	2007	35.7	18
Macedonia	2007	10	10
Mongolia	2007	10	10,25
Montenegro	2007	9	9
Kazakhstan	2007	10	15
Pridnestrovie	2007	10	0
Bulgaria	2008	10	10
Czech Republic	2008	15	15
Mauritius	2009	15	15
FBiH	2009	10	10
Belarus	2009	12	24
Belize	2009	25	25

A few comments on the table are in order. All but the first four entries were implemented after the collapse of the Soviet empire, most being former states within the Soviet Union. The spread of the flat tax was contagious, as one country after another enacted flat taxes to maintain competitiveness with neighboring countries to attract both foreign and domestic investment.

The more recent entries in the table have tended to enact very low flat rates, with the modal rate at 10 percent. Thirteen have unified their personal and corporate income rates, with the others maintaining different rates between personal and corporate tax rates.

The Flat Tax at Work in Moscow’s Real Estate Market

2010-03-07T10:12:00.000-08:00

Those of you who have followed the flat tax revolution, beginning with the Baltic state of Estonia in 2004, know that Russia was the first large country to adopt the flat tax, effective January 1, 2001. This blog has posted results for Russia’s flat tax each year for the seven years 2001-07, documenting the rapid growth in revenue attributable to the flat tax.

The weekend edition (March 6-7, 2010) of the Financial Times carried a story on the Eastern Europe property market in the wake of the global financial crisis. The author noted that some Eastern European countries were faring better than many in Western Europe.

Prospects in Moscow were sufficiently attractive for British real estate firm Chesterton Humberts to open an office earlier this year. One of its agents, Greg Thain, who has lived in Moscow for 17 years, explained why:

"Working Russians have large disposable incomes because they pay just 13 percent [the flat rate] in tax and utilities are very low in real terms." Moscow’s population has grown rapidly because everyone in Russia who wants a good job moves to Moscow and the low flat-rate income tax enables many to afford a housing unit.

Libya Ponders the Flat Tax

2010-03-02T07:47:00.000-08:00

The New York Times of February 28, 2010, carried a lengthy story on Seif al-Islam el-Qaddafi, the son of and possible successor to Libya’s ruler Colonel Muammar el-Qadaffi. The young Qaddafi is Western educated, with a Ph.D. from the London School of Economics.

Seif wants to reform Libya’s economy, opening it to Western investment and transform it into the Dubai of North Africa. His ideas include massive investment in infrastructure, a free-trade zone for foreign investment, a new business and commercial legal code, and a 15 percent flat tax.

Seif’s views on the flat tax are attributable to two factors. In 1996, while attending a meeting of the Mont Pelerin Society in Vienna, I taught a one-credit, day-long course on tax policy at IMADEC (International Management Development Consulting) University. I concluded with an exposition of the flat tax, which had then been adopted in the three Baltic countries of Estonia, Latvia, and Lithuania. Among the students was Seif al-Islam el-Qaddafi, who asked several interesting questions about the flat tax.

A second factor is its spread to another two dozen countries with positive results for fiscal policy and economic development.

The flat tax is only one, but very important, ingredient in the matrix of economic policies that fosters investment and growth. If and when Libya adopts a 15 percent flat tax, it will be a sign that the country has chosen, as Deng Xiaoping put it for China in 1982, to open up to the West.

The Flat Tax Will Not Lower Housing Values

2010-02-20T16:33:00.000-08:00

Critics of the flat tax charge that eliminating the home mortgage interest deduction in exchange for a low flat rate tax would reduce the value of owner-occupied housing, the single largest asset of most American households. Critics further contend that the loss of this tax benefit will also reduce the incentive to buy a home, a cornerstone of the American dream.

The critics are wrong. Home ownership in the United states stands at about 67 percent of the population. In comparison, the rate of ownership in the United Kingdom and Australia is about 69 percent and 67 percent in Canada. Yet, mortgage interest is not deductible in any of these three countries.

A Modest Proposal for Greece

2010-02-11T08:44:00.000-08:00

There is a simple solution to address the problem of massive tax evasion that has put Greece's public finances and debt in peril.

Greece can learn from Hong Kong. Enact a low flat tax that includes a version of Hong Kong's "Prevention of Bribery Ordinance". That ordinance, imposed in the mid-1970s to break a ring of political corruption, allowed the government to prosecute any public official living beyond his means who cannot show legitimate sources of income which fund that lifestyle. In addition, several high profile individual tax cheats should be aggressively prosecuted, as was done in Russia, to encourage full compliance.

Flat Tax Countries Flourish

2010-02-10T09:00:00.000-08:00

Critics of the flat tax have warned, among other fears, that flat tax countries would face severe fiscal crises compared with the more progressive, high tax democracies. The current economic, financial, and fiscal crises provide an opportunity to assess this charge.

First, more progress on the flat tax front. Lithuania was the third country in Eastern Europe to adopt the flat tax in 1996, following Estonia in 1994 and Latvia in 1995. Lithuania initially set the personal income tax rate at 24 percent and the corporate rate at 15 percent. As of January 2010, the personal rate, which includes wage and self-employment income, was cut to 15 percent. The rate on dividends, capital gains, and corporate profits are also at 15 percent. Micro companies with ten or fewer employees and income up to Lithuanian Litas 500,000 (US$200,000) are entitled to a reduced 5 percent rate.

The Financial Times of February 11, 2010, displayed a chart of estimated gross government debt as a percentage of gross domestic product in 2010 for 27 European countries. The Eurozone average is put at 84 percent and the overall European Union average at 79.3 percent. Six of the eight lowest indebted are flat tax countries in Eastern Europe, with an average gross public debt of 29.2 percent, about a third of the overall Eurozone average.

Belize Joined the Flat Tax Club

2010-01-27T11:42:00.000-08:00

Belize (formerly British Honduras), situated on the northeast tip of Central America, joined the flat tax club in 2009. Previously, personal income tax rates ranged between 25-45 percent, with an exemption for the first US$20,000 of income. The exemption remains at US$20,000, after which additional income is taxed at a flat rate of 25 percent.

Since January 1, 2009, corporate income tax was also set at 25 percent, down from the previous level of 35 percent.

Flat Tax in Turkmenistan

2010-01-06T12:12:00.000-08:00

I previously posted that Kyrgyzstan enacted a 10% flat tax that took effect in 2006, followed by a 10% flat tax in Kazakhstan in 2007. To those two "stans" should be added Turkmenistan, which earlier adopted a 10% flat tax for resident individuals that took effect in 2005. The next closest "stan" to a flat tax is Tajikistan, which has two rates of 8% and 13%. Uzbekistan continues to have a much more steeply graduated system of personal tax rates, ranging between 13-30%.

January 2010: Ups and Downs with the Flat Tax

2010-01-02T10:06:00.000-08:00

Romania held on to its 16 percent flat tax, despite enormous pressure from the International Monetary Fund as a condition of getting aid.

Latvia, too, held on to its flat tax, but was compelled to increase its rate from 23 to 26 percent to secure IMF support.

Jamaica’s response to an IMF deal included a temporary surcharge on its 25 percent flat tax of an additional 2.5 percent on earnings exceeding J$5,000,000 and an additional 10 percent above J$10,000,000. (US$1=J$89) The surcharge is to be in effect from January 10, 2010, to March 31, 2011.

A Libertarian candidate, Otto Guevara, for the presidential election in Costa Rica, which is scheduled for February 7, 2011, supports the flat tax. He dramatically improved his standing in the polls in the last few months by 18 percentage points and, if he continues to gain support, could actually win high office.

Taskforce 2025 in New Zealand called for a flat tax of 20 percent to catch up with Australia. The tax reform would also eliminate capital gains tax and cap government spending at 29 percent of GDP by 2012/13. Current top rates of tax are 38 and 30 percent on individuals and businesses.

Panama’s president, Ricardo Martinelli, plans to push hard for a flat tax in 2010.

A group in Haiti has asked for my help to develop options for a flat tax. Stay tuned.

On January 1, 2010, Qatar replaced its 35 percent top rate corporate income tax with a 10 percent flat rate.

Finally, sigh, the IMF never gives up pushing for higher tax rates on high income earners. Its advice to the Marshall Islands is to establish a tax base that adds higher brackets on personal income (rates not specified).

2009-10-27T12:53:00.000-07:00

Flat Tax Update, October 2009

After a relatively quiet year, the flat tax is showing new life.

Prime Minister Najib Razak of Malaysia introduced his government’s 2010 budget on October 27, 2009. The budget contained modest reductions in public expenditure and taxation, but also included a special provision to promote selected important industries for Malaysia’s economic development. Both foreign and Malaysian employees will be taxed at a flat rate of 15 percent if they work in the fields of green technology, biotechnology, educational and healthcare services, financial advisory and consultancy, logistics, and tourism. The idea is to provide a more attractive workplace for these activities in Malaysia than Singapore, which taxes personal income up to a higher 20 percent rate.

In November, Zimbabwe’s finance minister will announce his country’s new budget for 2010. The Zimbabwe Telegraph reported that his budget is likely to include a flat tax regime.

International aid agencies have been pressuring the Baltic countries to abandon their flat taxes as the price of financial assistance to assist them through the global financial crisis. Latvia and Lithuania have been the two principal targets of these efforts. Thus far, both have successfully resisted abandoning their flat taxes in exchange for financial aid. They have agreed to cut spending and adopt other austerity measures, but not to replace the flat tax with graduated tax rates.

The Saskatchewan office of the Frontier Center for Public Policy (with offices also in Manitoba and Alberta) released Policy Studies No. 68 in September 2009 by David Seymour entitled "Five Single Rate Tax Thoughts." This study is likely to influence tax policy after the next Saskatchewan provincial election

Interest in the flat tax has begun to appear in the media in Moldova, Uganda, and Aruba.

2009-08-14T09:07:00.000-07:00

Britain Experiments With a Flat Tax

Desperate for revenue to plug gaping deficits in their public finances, the Western democracies are waging an all-out assault on tax havens around the world. On August 12, 2009, Liechtenstein capitulated to British demands that its private banks will no longer hold secret British accounts that enable Britons to evade British taxes. It is estimated that there are 5,000 British accounts holding about $5 billion in secret accounts. Between 2010 and 2015, British investors holding funds in these accounts will be given preferential terms of a 10 percent penalty on evaded tax, plus repayment of evaded tax, if they voluntarily declare their tax arrears to Her Majesty’s Revenue and Customs.

Those who come forth voluntarily will also be given the option of paying a 40 percent flat tax on all outstanding tax claims. Although an ostensibly high rate, the 40 percent flat tax replaces all other British taxes due including national insurance, inheritance, income, and value added taxes.

Those who do not comply will be required to move their funds out of Liechtenstein by 2015 and their names will not be provided to British tax authorities. However, if caught, the penalty will be 100 percent, and it is most likely that all such individuals, companies, trusts, and other structures will remain under Her Majesty’s Revenue and Customs microscope for years to come.

It seems logical that Britain will work out a similar arrangement with Switzerland and other tax havens around the world. One might hope that this flat tax experiment will be so successful that Parliament will give serious thought to replacing all its taxes with a simple, but lower than 40 percent, flat tax.

Other Flat Tax News

From October 1, 2009, Romania will no longer tax reinvested profits. This change will make the country’s 10 percent flat tax on corporate and personal income even more attractive to investors.

In summer 2009, Rwanda tendered for a consultancy firm to conduct a study into the adoption of a flat tax. Uganda is watching the results of this exercise.

Following the landslide election victory of Ricardo Martinelli as president of Panama in June 2009, the new minister of economy and finance announced in early July the government’s plan to implement tax reforms as Martinelli promised during the campaign. One phase is the application of a flat tax.

Latvia and Lithuania have thus far resisted pressure from the International Monetary fund and internal political groups to replace their flat taxes graduated rates.

In May 2009, Moldova’s acting president Vladimir Voronin proposed that the government should examine the introduction of a 15 percent flat tax on individuals to raise the competitiveness of Moldova’s economy to that of neighboring flat-tax countries.

In Canada, Alberta is the only province with a flat-rate provincial income tax, assessed at 11 percent. Its success has prompted neighboring Saskatchewan to consider a 10 percent flat tax to stop leakage of economic activity to Alberta. The maritime province of New Brunswick is also considering a flat tax.

In September the Swiss Canton Thurgau will hold a referendum on the flat tax. If it passes, which appears likely, Thurgau will increase the number of flat-tax cantons to three.

2009-02-20T12:05:00.000-08:00

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.

2009-02-12T10:26:00.000-08:00

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.

2009-01-21T10:46:00.000-08:00

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%.

2008-12-29T08:46:00.000-08:00

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.

2008-12-15T09:26:00.000-08:00

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.

2008-12-11T11:39:00.000-08:00

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.

2008-11-30T12:37:00.000-08:00

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.

2008-11-29T07:52:00.000-08:00

The Flat Tax Spreads to the Canton of Uri in Switzerland

November 6, 2008

By Alvin Rabushka

Switzerland has a three-tiered income tax system in which income taxes are levied at the federal, cantonal, and municipal level. On average, about a third of all personal income taxes is collected at each level, although there is wide variation among the twenty-six cantons and some 2,900 municipalities. The federal income tax consists of nine brackets that range from 0% on the first Swiss francs (CHF) 25,000 ($1 = CHF 1.175) to a top rate of 13.2%, after which it falls to 11.5% on income exceeding CHF 716,500.

On September 28, 2008, the Canton of Uri adopted a flat-rate personal income tax to commence January 1, 2009. The new law imposes a flat-rate of 7.2% for the canton, and 7.2% for each municipality in the canton. An additional 1% for churches brings the total to 15.4%. The law includes a personal deduction of CHF 14,500 along with a married deduction of CHF 11,000 and child deductions ranging from CHF 8,000 to CHF 20,000.

A married taxpayer with two children with a gross income of CHF 100,000 would be allowed to deduct, in addition to CHF 41,000 for spouse and children, another CHF 11,850 for old age and survivors insurance, and another CHF 7,300 for job-related expenditures and insurances. This leaves a taxable base of CHF 37,350 subject to the two flat rates for cantonal and municipal taxes. Including federal tax of CHF 106, total tax of CHF 5,484 represents less than 6% of gross income.

The tax rate on profits on domestic Swiss enterprises is a flat 4.7% at both the canton and municipal levels. To this is added 1% for churches, resulting in a flat-rate of 10.4%. A holding company which has no active business in Uri is exempt from cantonal and municipal taxes. There is a small municipal wealth tax of 0.001% that does not take effect until wealth reaches CHF 2 million.

Uri thus joins the Canton of Obwalden with a flat tax, Other cantons are actively exploring the flat tax as part of their plan to attract investment and high-income individuals.

2008-11-29T07:51:00.000-08:00

The Flat Tax at Work in Russia: Year Seven, 2007

August 28, 2008

By Alvin Rabushka

The Federal Treasury of the Russian Federation has compiled the data for total taxes and revenues for the consolidated federal and regional budgets for 2006. The data show that the 13% flat tax on personal income continues to achieve very positive results.

In 2007, the Treasury collected 1,266.6 billion rubles ($1=RUB24.6) in personal income tax receipts, a nominal increase of 36.1% over the 930.3 billion rubles in 2006. After adjusting for annualized consumer price inflation of 11.9% in 2007, real personal income tax revenue rose 17.8% in 2007. Total real ruble revenue has substantially more than tripled in the seven years since the 13% flat tax was implemented on January 1, 2001. It should be recalled that the top marginal rate in 2000 was 30% before the implementation of the 13% flat tax. The low flat rate has contributed to the decline in capital flight, improved taxpayer compliance, and increased revenue.

The 13% flat tax has become a stable feature of Russia’s tax system. With the rise in real incomes percolating through the economy, receipts continue to grow at a healthy clip.

2008-11-28T09:41:00.000-08:00

Trinidad and Tobago Joins the Flat Tax Bandwagon

April 20, 2008

By Alvin Rabushka

Effective January 1, 2006, Trinidad and Tobago joins the ranks of the flat-tax countries. It implemented a flat tax of 25%, replacing the previous two-bracket system of 25% and 30%. Other features included raising the personal allowance from TTD (Trinidad and Tobago dollars) 25,000 to TTD 60,000 ($1 = TTD 6.265). A previously preferential TTD 40,000 allowance for individuals 60 years and over was eliminated, along with deductions of up to $18,000 for mortgage interest and $10,000 for first-time homeowners. Short-term capital gains are taxed as ordinary income.

The corporation tax was reduced from 35% to 25%, except for petrochemical and gas refining companies, which are taxed at 35%, and oil and gas exploration companies, which are taxed at 55% (of which 5% represents unemployment insurance). As of 2006, the rates for wages, salaries, self-employment income, and non-energy corporation income are a uniform 25%.

In 2008, the deduction for contributions to approved pension fund/annuity plans was increased from TTD 12,000 to TTD 25,000. The tax rate on dividends was lowered from 15% to 10%, which reduced the double tax on corporate income by 4.25%. For corporations, the first-year write-off for the cost of investment in plant and machinery was raised from 60% to 75%.

2008-11-28T09:40:00.000-08:00

Kazakhstan Joins the Flat Tax Bandwagon

February 25, 2008

By Alvin Rabushka

On February 1, 2006, the president of Kyrgyzstan signed into law a change in the country’s tax code that substituted a 10% flat tax on individual income in place of a graduated structure of rates between 10-20%. At that time the president of neighboring Kazakhstan said that his country would consider implementing a flat tax in 2007.

Kazakhstan enacted substantial changes in the country’s tax code on July 7, 2006, and December 11, 2006. Effective January 1, 2007, a 10% flat rate on taxable individual income replaced the country’s previous six-rate system of 5, 10, 15, 20, 30, and 40% depending on income. The lowest 5% rate applied to the first 69,600 Tenge (KZT) of income with the top 40% rate on income exceeding 348,000 KZT. ($1 = 120.5 KZT) The 10% flat tax exempts from taxation a personal allowance linked to the minimum wage level.

Other changes reduced the interest withholding rate for individuals to 10% and the domestic individual dividend withholding rate to 5%. Self-employed individuals using simplified tax returns are charged a 3% flat rate. Capital gains on government bonds and the sales of securities listed on a stock exchange are tax-exempt.

2008-11-28T09:39:00.000-08:00

The Flat Tax is on the Agenda in Hungary

January 14, 2008

By Alvin Rabushka

Hungary is surrounded on several sides by flat tax countries: Slovakia in the north, Ukraine in the northeast, Romania in the east, and Serbia in the south. Near flat-tax neighbors include Bulgaria, Montenegro, Macedonia, and the Czech Republic. Hungary’s business daily Világgazdaság reported on January 11, 2008, that the current coalition government, which consists of the Socialist Party, the senior member of the ruling coalition, and the market oriented Free Democrats, is considering four tax measures to boost economic competitiveness. The chosen measure is expected to take effect in January 2009.

One tax reform proposes to reduce the tax wedge on labor by lowering the social security contribution (payroll tax) from 29% to between 19-21%. Part of the lost revenue would be recovered with an increase in the value added tax from 20% to 22-24%.

Another would reduce the corporate tax burden either by lowering the current 16% corporate rate or abolishing the 4% solidarity tax imposed on corporations.

The remaining two reforms constitute alternative flat taxes. One would broaden the tax base by including social security contributions in the income tax base and slashing the rate to a very low level, which was the approach taken in the Czech Republic’s 15% flat tax. The other flat tax would be applied to personal income, excluding social security contributions from the tax base, and perhaps also applying the same flat rate to the corporate and value added taxes.

Coalition deliberations are expected to conclude in late January to permit the spring session of Parliament to enact the chosen measure into law.

2008-11-28T09:37:00.000-08:00

The Flat Tax Begins to Percolate in New Zealand

January 14, 2008

By Alvin Rabushka

New Zealand is scheduled to hold general elections for the 49th session of its parliament in late 2008, but no later than November 15, 2008, to comply with the convention that sessions shall not exceed three years. Current polls suggest that the opposition National Party will supplant the Labour Party as the leading vote-getter, but whichever wins a plurality of votes may have to form a coalition with the Green Party. Other minor parties include the Maori and the First-ACT parties.

Polls show that voters in the National, Green, Maori, and First-ACT parties favor a flat tax of 20% on both personal and corporate income, with the lost revenue to be recovered by increasing the Goods and Services Tax (a VAT) from 12.5% to 20%. A survey conducted by Shape NZ revealed that the combination of a 20% flat-rate personal and corporate income taxes coupled with a rise in GST tax was preferred by voters in the four parties to the alternatives of cutting the top personal rate from the current 39% to 30%, or setting the top personal and corporate rates (currently 33%) at 28%.

The New Zealand Business Council for Sustainable Development, which supports the 20% flat tax, maintains that it would encourage innovation and promote economic growth.

Shape NZ research can be accessed at www.shapenz.co.nz.

2008-11-28T09:34:00.000-08:00

The Flat Tax Spreads to the Canton of Obwalden in Switzerland

January 2, 2008

By Alvin Rabushka

Switzerland has a three-tiered income tax system in which income taxes are levied at the federal, cantonal, and municipal level. On average, about a third of all personal income taxes is collected at each level, although there is wide variation among the twenty-six cantons and some 2,900 municipalities. The federal income tax consists of nine brackets that range from 0% on the first Sfr 25,000 ($1 = Sfr1.13) to a top rate of 13.2%, after which it falls to 11.5% on income exceeding Sfr 716,500.

In January 2006 the Canton of Obwalden had previously established a degressive system of personal income tax rates that set lower rates with increases in taxable income. The Federal Court ruled this arrangement unconstitutional in June.

In response, Obwalden’s authorities proposed a flat income tax rate of 1.8%, exempting the first Sfr 10,000 of income from taxation. In a referendum, 90.7% of the electorate in Obwalden approved the measure. The new flat tax will take effect on January 1, 2008. The canton also reduced its corporate tax rate from 6.6% to 6%.

Under the pressure of tax competition to lure high-income individuals to reside in specific cantons, the cantons of Uri and Thurgau are also considering a flat-rate income tax. Should these two adopt a flat-rate income tax, it is likely that other cantons will consider the flat tax to retain their competitiveness for high income individuals.

2008-11-28T09:23:00.000-08:00

The Flat Tax in Jamaica

January 3, 2008

By Alvin Rabushka

The flat-tax revolution has mainly encompassed Central and Eastern Europe. It has also touched Central Asia and Africa. For completeness, it is desirable to include the case of Jamaica, which has thus far been overlooked in these comments on countries that have adopted flat taxes.

The first general income tax took effect in Jamaica in 1920. It included a small exemption and consisted of rates that ranged between 1-10%. The postwar modern income tax was enacted in 1955 with graduated rates that ranged from a low of 30% on the first J$7,000 of taxable income to a high of 57.5% on all income above J$14,000. The effective rate was lower due to sixteen tax credits of various amounts that enabled individuals to avoid or evade a portion of their income from taxation.

The government of Jamaica undertook a major tax reform in 1986. It replaced all tax credits with a standard deduction of J$8,580. (The exchange rate was US$1 = J$5.56 in 1985 on the eve of the reform.) The tax base includes the Jamaican dollar value of fringe benefits and payments for reimbursable and non-reimbursable expenses. Interest income became subject to tax, and the previous graduated-rate structure was replaced with a flat-rate tax of 33⅓%.

Subsequent changes reduced the flat rate to 25% effective January 1, 1993, and raised the standard deduction almost every year to compensate for inflation. Beginning January 1, 2007, the tax exempted the first J$275,000 in income (equivalent to US$ 3,567 at the January 3, 2008, exchange rate of US$1 = J$77.1) The tax on interest from banks and life insurance companies was also set at 25%.

The details and effects of the post-1986 reform, from which much of the forgoing information was taken, are set forth in a paper written by Sally Wallace and James Alm of Georgia State University entitled “The Jamaican Individual Income Tax”(August 2004). The paper is available at http://aysps.gsu.edu/publications/alm/jamaica_individtax.pdf.

2008-11-28T09:21:00.000-08:00

The Flat Tax is Implemented in Bulgaria

January 2, 2008

By Alvin Rabushka

Effective January 1, 2008, Bulgaria joins the raft of Central and Eastern European countries which have adopted the flat tax.

Bulgaria’s new 10% flat-rate personal income tax replaces the previous system of three graduated rates of 20, 22, and 24%. The new 10% flat tax applies to the first leva (BGN) of income, eliminating the previous annual tax-free threshold of 2,160 leva. ($1=BGN 1.34)

In 2006 the government reduced the corporate profits tax from 15% to 10%. Bulgaria now imposes a uniform 10% flat rate on personal and corporate income. To minimize double taxation, a 5% rate was imposed on dividends and capital gains. Sole proprietors are assessed at a flat rate of 15% on net income.

The next goal is a reduction in the social security tax to 10%.

2008-11-28T09:20:00.000-08:00

The Flat Tax at Work in Russia: Year Six, 2006

December 13, 2007

By Alvin Rabushka

The Federal Treasury of the Russian Federation has compiled the data for total taxes and revenues for the consolidated federal and regional budgets for 2006. The data show that the 13% flat tax on personal income continues to achieve very positive results.

In 2006, the Treasury collected 930.4 billion rubles ($1=RUB24.4) in personal income tax receipts, a nominal increase of 31.6% over the 707 billion rubles in 2005. After adjusting for annualized consumer price inflation of 9.0% in 2006, real personal income tax revenue rose 22.6% in 2006. Total real ruble revenue has more than tripled in the six years since the 13% flat tax was implemented on January 1, 2001. It should be recalled that the top marginal rate in 2000 was 30% before the implementation of the 13% flat tax. The low flat rate has contributed to the decline in capital flight, improved taxpayer compliance, and increased revenue.

The 13% flat tax has become a stable feature of Russia’s tax system. With the rise in real incomes percolating through the economy, receipts continue to grow at a healthy clip.

2008-11-28T09:19:00.000-08:00

The Flat Tax at Work in Montenegro

November 26, 2007

By Alvin Rabushka

In December 2006, Montenegro’s parliament approved a 15% flat tax on personal income. The new law sets the flat rate at 15% in 2007 and 2008, reduces it to 12% in 2009 and 9% in 2010. Montenegro has set the corporate profits tax rate at 9%, reduced from the previous two-rate system of 15% on taxable profit up to €100,000 and 20% on the gain exceeding €100,000. In 2010, Montenegro will have a unified flat tax of 9% on personal and corporate income.

The tax rate reductions have had a positive effect on bringing underground economic activity out into the formal economy, where it can be taxed, and improving compliance.

In a report released by Montenegro’s government, the tax administration collected 30% more revenue in the first 10 months of 2007 over the comparable period in 2006. For the month of October 2007 compared with October 2006, the increase in revenue consisted of a gain of 13% in personal income taxes, 100% in business profit taxes, 25% in value added taxes, and 150% in property taxes. These results mirror the same pattern that emerged in Russia, Romania, and other Central and Eastern European countries that previously adopted the flat tax as part of a process of tax reform and tax-rate reductions.

2008-11-28T09:18:00.000-08:00

The Flat Tax Expands its Ambit in Georgia

October 31, 2008

By Alvin Rabushka

Two recurrent issues in the United States are reforming the federal income tax and saving Social Security. The complexity of the federal income tax code, surpassing 66,000 pages of laws, regulations, and instructions, needs little elaboration. With baby boomers beginning to retire, the solvency of Social Security, with fewer workers supporting more retirees, is at risk. Politicians have been willing to propose various tax reforms, with little success since 1986, but have been more reluctant to take on Social Security. President George Bush tried, but failed, to push through a reform of Social Security that included private accounts.

In an article I published on December 4, 1998, in the editorial pages of the Wall Street Journal, I proposed linking Social Security and tax reform. My proposal called for extending the Social Security payroll tax of 12.4% to all wage income, rather than limit it to a wage cap of $68,400 (just under $100,000 today). Removing the cap would reduce the regressivity of the payroll tax, which taxes the first dollar of wage income, but ceases for wage income exceeding the cap. The additional revenue would make it possible to reduce the payroll tax rate by nearly 2%, and put Social Security and Medicare taxes on the same playing field. Subjecting capital income to the payroll tax would permit an even larger-reduction in the payroll tax rate.

The other half of the proposal, tax reform, would consist of a flat tax of 20 percent or less on income, with a large personal allowance that then would exempt the first $30,000 ($40,000 today) of income for a family of four. Taken together, the two taxes would be progressive, because a flat income tax would exempt the first $40,000 of income. The higher payroll taxes on wealthy Americans would by offset by a reduction in their marginal income tax rates. Altogether, a flat tax of 30-32%, with a substantial personal allowance, would fund both Social Security and the federal government, and greatly simplify the tax code.

Effective January 1, 2005, Georgia (the country, not the U.S. State) adopted a flat tax of 12%, replacing its previous four-bracket system. The flat tax was augmented with a 20% tax on corporate profits, 20% on social insurance (reduced from 33%), and 18% (reduced from 20%) on VAT.

The new, simpler system has had a dramatic effect on economic growth, averaging 10% a year for the past three years, and taxpayer compliance. Tax revenue increased from 14.5% of GDP in 2003 to 22% in 2006, and should reach 24% in 2007.

Between 2003 and 2007, the reforms reduced the number of taxes from 22 to 7. In 2008, the personal income tax and payroll tax are to be merged as a single tax at a flat rate of 25%. When this merger is consummated, Georgia will be the first country to adopt a single flat tax in lieu of both personal income and payroll taxes. Although Georgia is a small country of 4.4 million people, perhaps its tax reforms can serve as a model for the United States.

2008-11-28T09:16:00.000-08:00

The Flat Tax May Soon Spread to Poland

October 22, 2007

By Alvin Rabushka

On October 21, 2007, Polish voters turned out the sitting Law and Justice Party that had governed in a fractious coalition for the past two years. In its place, they gave a plurality of votes to Civic Platform, whose chairman, Donald Tusk, is set to become Poland’s next prime minister.

Civic Platform received 41.4 percent of the vote, which gives it 209 seats out of the 460 seats in the lower house. Mr. Tusk needs the support of another 22 lower house members to govern in a majority coalition. The leader of the moderate Polish Peasants Party, which received 8.9 percent of the vote and 31 seats, stated that his party was prepared to join Civic Platform in government, thereby providing a majority.

Civic Platform campaigned on economic themes of lower taxes and less spending. It promised to enact a 15 percent flat tax on both corporate and individual income. The flat tax would replace the current three-bracket system of 19, 30, and 40 percent imposed on individuals and reduce the corporate tax from its current rate of 19 percent.

Assuming that the new Polish government succeeds in enacting a flat tax, it would place Poland in line with many of its competitors in Central and Eastern Europe. Most of Poland’s neighbors—Estonia, Latvia, Lithuania, Russia, Ukraine, Slovakia, Czech Republic, Serbia, Montenegro, Macedonia, Albania, Georgia, Romania, and Bulgaria—have already adopted a flat tax. Passage in Poland would leave only a handful of countries in Central and Eastern Europe—Hungary, Slovenia, Croatia, Bosnia and Herzegovina, Belarus, and Moldova—clinging to graduated rates.

2008-11-28T09:15:00.000-08:00

The Flat Tax is Finalized in the Czech Republic

October 15, 2007

By Alvin Rabushka

The flat tax is now the law of the land in the Czech Republic. On October 5, 2007, President Vaclav Klaus signed into law the government’s tax reform plan. Previously, on August 21, 2007, by a narrow vote of 101 to 98, the Chamber of Deputies (the lower house of the Czech Parliament) approved the tax reform, followed on September 19, 2007, by a vote of 49 to 27 in the Senate (the upper chamber).

The reform is in two parts. One involves the personal income tax. Beginning January 1, 2008, the current system of four rates, 12, 19, 25, and 32%, will give way to a flat rate of 15%, followed by a further reduction to 12.5% in 2009. In exchange for the lower rates, social and health insurance contributions will be included in the tax base of the personal income tax. When the 12.5% rate takes hold, the flat rate on gross income will come to 19.4%.

The other involves the corporate income tax, which will be reduced from 24 to 21 percent in 2008 and to 19 percent in 2009. In effect, this puts the Czech Republic on a level playing field with neighboring Slovakia, which imposes a 19 percent flat rate on both personal and corporate income taxes.

2008-11-28T09:14:00.000-08:00

The Flat Tax is Likely to Spread to Bulgaria in 2008

August 29, 2007

By Alvin Rabushka

Bulgaria’s income tax system consists of a corporate income tax of 10% (reduced from 15% in 2006) and personal income tax of three graduated rates of 20, 22, and 24%, which puts personal rates above many of its neighbors. The last four countries to enact flat tax legislation, Macedonia, Montenegro, Albania, and the Czech Republic, have set rates, when fully implemented over the next few years, between 9 and 12½%.

Confirming earlier statements in late July of the prime and finance ministers that Bulgaria would move to adopt a flat tax to enhance the country’s economic climate, Economy and Energy Minister Petar Dimitrov said on August 15, 2007, that Bulgaria will definitely adopt a uniform flat tax on both personal and corporate income to take effect in 2008. The rate, as yet undecided, will be set at either 10 or 12%. The lower rate would match those in Albania and Montenegro. A personal allowance will exempt some income from tax, but the level has not yet been determined.

Bulgarian proponents of tax reform cite the success of Slovakia, which introduced its 19% flat tax in 2003. Slovakia has attracted billions of euros in investments, including Korean car-maker Hyundai and consumer electronics giant Sony, which, in turn, have attracted dozens of Hyundai and Sony subcontractors to the country.

Proponents of the flat tax emphasize its simplicity, with less red tape and time and money expended in filing tax returns. In simplifying its personal income tax, Bulgaria will also satisfy European Union complaints that Bulgaria is a nation with a cumbersome tax administration. Other anticipated benefits of the flat tax include a reduction in personal income taxes for a majority of the population, and bringing income out of the underground economy into the open market, thereby enhancing its efficiency for investment and increasing the base of income subject to tax. At 10%, individuals have less incentive to hide income compared with the current 24% top rate.

Bulgarian opponents object to the flat tax on the ground that it disproportionately benefits the more affluent population, which goes against their social principles of equity. However, a majority in Parliament believe the need to attract investment and create jobs requires that the country’s income tax system be competitive with its neighbors vying for the same investment.

If enacted, Bulgaria will join the bandwagon of thirteen other countries in Central and Eastern Europe that have enacted flat taxes since 1994: Estonia, Latvia, Lithuania, Russia, Ukraine, Slovakia, Serbia, Georgia, Romania, Macedonia, Montenegro, Albania, and the Czech Republic. If the territory of Pridnestrovie is treated as a country (rather than an integral part of Moldova), the number of flat-tax countries in Central and Eastern Europe would stand at fifteen.

Outside of Europe, other countries that have recently adopted a flat tax include Iraq, Kyrgyzstan, Mauritius, Mongolia, and Iceland (though Iceland’s 35.73% rate violates the principle that the flat rate should be low, preferably below 20%).

2008-11-28T09:12:00.000-08:00

The Flat Tax Spreads to the Czech Republic

August 27, 2007

By Alvin Rabushka

On August 21, 2007, by a narrow vote of 101 to 98, the Chamber of Deputies (the lower house of the Czech Parliament) approved a public finance reform package submitted by the center-right cabinet of Prime Minister Mirek Topolánek. Although the measure requires the approval of the Senate (the upper house of Parliament, where the ruling coalition has a majority), and the signature of President Václav Klaus, both are expected to approve the package. Opposition deputies pledged to revise the reform when they return to power. The current government in Slovakia made a similar pledge during the last election campaign, but once in office have made no serious attempt to undo the country’s 19% flat tax on personal and corporate income.

The reform package consists of two major changes in taxation. One involves the personal income tax. Beginning January 1, 2008, the current system of four rates, 12, 19, 25, and 32%, will give way to a flat rate of 15%, followed by a further reduction to 12.5% in 2009. In exchange for the lower rates, social and health insurance contributions will be included in the tax base of the personal income tax. When the 12.5% rate takes hold, the flat rate on gross income will come to 19.4%. (The information reported in several English-language press reports does not provide any details on the level of personal exemptions or if the tax base excludes any other deductions. Further details will be posted to this site when they become available.)

To maintain competitiveness with other Central and Eastern European countries, the package successively reduces the corporate tax rate from 24 to 21% in 2008, 20% in 2009, and 19% in 2010. These reductions will put the Czech Republic on an even playing field with its neighbor Slovakia.

This web site has chronicled the adoption of the flat tax around the world since its first adoption in Estonia beginning 1994. The list of countries in Central and Eastern Europe also includes Lithuania, Latvia, Russia, Ukraine, Serbia, Slovakia, Georgia, Romania, Macedonia, Montenegro, Albania, and Pridnestrovie (self-declared independent country adjoining Moldova, but which lacks international recognition). The remaining countries in the region that still retain multiple rates on personal income are Poland, Hungary, Slovenia, Bulgaria, Moldova, and Belarus.

New elections are anticipated in autumn 2007 in Poland, with one of the leading parties supporting a flat tax. Slovenia recently enacted a slight reduction in its personal tax rates, but rejected the flat tax. Bulgaria has narrowed its three rates to 20, 22, and 24%, which makes the prospect of its adopting a flat rate increasingly likely. At the time of this writing (late August 2007), there are no major movements toward a flat tax in Hungary, Moldova, and Belarus.

2008-11-28T09:10:00.000-08:00

A Low Flat Tax Has Been Adopted in Pridnestrovie

August 17, 2007

By Alvin Rabushka

The people of Pridnestrovie regard their land as an independent country, although it has not been internationally recognized as a sovereign state. The jurisdiction’s full name is Pridnestrovskaia Moldavskaia Respublica (Pridnestrovian Moldavian Republic), and it is sometimes referred to as Transnistria. Its long western border is contiguous with the eastern border of Moldova. Its residents contend that on June 28, 1940, Stalin used the Molotov-Ribbentrop Pact, which created spheres of influence for Germany and Russia over several Eastern European countries, to join Pridnestrovie with Moldova. The pact was subsequently annulled, which led Pridnestrovie to argue that Moldova’s claim of sovereignty over its territory is invalid. Following a nationwide referendum, Pridnestrovie declared independence on September 2, 1990.

Despite the lack of international recognition, Pridnestrovia exercises de facto political power. The territory maintains its own border guards and customs inspectors, its own professional military, nine political parties, and its own symbols of nationhood (flag, coat of arms, national anthem, local currency, postage stamps, passports, and constitution). It has its own president, parliament, executive, and judiciary, and a separate national budget of $250 million.

Pridnestrovie introduced its own taxation system shortly after its declaration of independence. On July 13, 2006, its parliament enacted a 10 percent flat tax on personal income, with an exemption of $100 a month ($1,200 a year). The 10 percent flat rate was a reduction from the previous rate of 15 percent, and a higher rate of 30 percent enacted in 2001. The government reduced the rate to maintain competitiveness with such Southeastern European nations as Macedonia, Montenegro, and Albania, which have set their rates at 9-10 percent.

Earlier in 2000 the legislature enacted a sales tax, and used the proceeds to abolish and replace five kinds of taxes—a value-added tax, a tax on profits, a road tax, a property tax on legal entities, and a fuel tax. As in other European countries, Pridnestrovie imposes a social insurance tax (reduced from 35 percent in 2001 to 24 percent in 2005). The remaining taxes include a fixed tax on agribusiness and a tax on the use of natural resources.

2008-11-28T09:08:00.000-08:00

The Flat Tax May Soon Spread to Bulgaria

August 1, 2007

By Alvin Rabushka

Bulgaria is on the brink of joining the flat-tax revolution that has swept throughout Central and Eastern Europe. Most of its neighbors, including Albania (flat rate of 10% in 2008), Romania (16%), Slovakia (19%), Serbia (14%), Macedonia (10% in 2008), Montenegro (9% in 2010), Georgia (12%), Ukraine (15%), Russia (13%), Estonia (18% in 2011), Latvia (25%), and Lithuania (24% in 2008) have adopted a flat tax in one form or another since 1994. The Czech Republic is currently proposing a unified 15% flat tax on corporations and individuals.

The politics of the flat tax in Bulgaria combines the left and right The ruling coalition in Bulgaria consists of three main parties. The largest is the Bulgarian Socialist Party. The other two are liberal (market-oriented) parties, the National Movement Simeon II and the Movement for Rights and Freedoms.

In 2006, Bulgaria reduced its corporate tax rate from 15% to 10% to enhance the country’s attractiveness to investors. Over a year later, on July 29, 2007, Bulgaria’s Finance Minister Plamen Oresharski announced that the leaders of the three main parties had decided at a cabinet meeting to propose a 10% flat-rate tax on personal income beginning in 2008. It would replace the current three-bracket personal income tax system which exempts the first 2,160 in annual Bulgarian Levas (US$1 = BGL 1.43), followed by a rate of 20% on income between BGL 2,161-3,00l, 22% on BGL 3,001-7,201, and 24% on income exceeding BGL 7,201.

Two days later, on July 31, 2007, Prime Minister Sergei Stanishev stated that the flat tax would increase revenue by reducing the underground economy, bringing this income to light and making it subject to taxation. The philosophy underlying the proposed flat rate of 10% is to apply a low tax rate to a broader base of income, replacing the current higher rates with numerous deductions that narrow the tax base. When the 10% flat tax on personal income is in place in 2008, the country will have a unified 10% income tax on corporations and individuals.

The government plans to introduce the proposed reform in parliament by the end of September after the summer recess. It appears likely to pass since the socialist-liberal coalition government enjoys a comfortable majority in Bulgaria’s parliament.

2008-11-28T09:06:00.000-08:00

The Flat Tax Spreads to Albania

June 6, 2007

By Alvin Rabushka

On May 30, 2007, Albania’s parliament approved a 10% flat tax on personal and corporate income. Based on its success throughout Central and Eastern Europe, Prime Minister Sali Berisher has been a strong supporter of the flat tax. The government hopes to implement the 10% flat tax on personal income by July 1, 2007. It replaces the previous system of five rates, 5% on monthly income between 14,000-40,000 leks ($1=91.62 ALL), 10% between 40,000-90,000 leks, 15% between 90,000-200,000 leks, 25% between 200,000-500,000 leks, and 30% over 500,000 leks. Dividends received by individuals remain taxed at 10%. The 10% tax also replaces the small business tax rate of up to 30% that applies to individuals.

The 10% corporate income tax replaces the current 20% rate on profits.

The Albanian government stated that its enactment of a 10% flat tax was intended to create a friendlier investment climate, make the economy more competitive, attract foreign direct investment, encourage the legalization of the shadow economy, and simplify tax collection.

2008-11-28T09:05:00.002-08:00

The Flat Tax Spreads to Montenegro

April 13, 2007

By Alvin Rabushka

In December 2006, Montenegro’s parliament approved a 15% flat tax on personal income. Effective July 1, 2007, it replaces the previous system of three rates of 16% on monthly taxable income between €65-218, 20% on monthly taxable income between €218-381 euro, and 24% on monthly taxable income exceeding €381 euro. (€1 = $1.35) The new law sets the flat rate at 15% in 2007 and 2008, reduces it to 12% in 2009 and 9% in 2010.

Montenegro has set the corporate profits tax rate at 9%, reduced from the previous two-rate system of 15% on taxable profit up to €100,000 and 20% on the gain exceeding €100,000.

In 2010, Montenegro will have a unified flat tax of 9% on personal and corporate income. This will be one percentage point less than the 10% unified rate in Macedonia, two points below Georgia, and three points less than Russia and Ukraine.

The flat tax movement in Montenegro was initiated in March 2004 by the Montenegro Business Alliance, a private Chamber of Commerce (www.visit-mba.org). Further information on Montenegro’s flat tax and its investment climate can be obtained from Dr. Petar Ivanovic, Director of the Montenegrin Investment Promotion Agency (www.mipa.cg.yu)

The flat tax has also been put on the agenda in three more countries. On March 13, 2007, Prime Minister Sali Berisha of Albania secured approval of the Strategic Planning Committee that he chairs for a unified 10% flat tax on personal and corporate income. The proposal has been sent to Albania’s parliament for its consideration. If enacted in a timely manner, the 10% tax on personal income would take effect on July 1, 2007. The proposed 10% flat tax on would slash Albania’s corporate 20% tax in half effective January 1, 2008. The reform will streamline the fiscal system, eliminating the arbitrage between the corporate tax, dividends, and the personal income tax.

In the Czech Republic, the government announced a raft of major tax reforms on April 2, 2007. If approved by the Czech parliament, the proposals set forth by Finance Minister Miroslav Kalousek would, effective January 1, 2008, levy a 15% flat tax on personal income, replacing the current system with four rates of 12, 19, 25, and 32%. The reforms also include a reduction in the corporate tax rate from 24% to 19%, putting the latter in line with those in neighboring Slovakia and Poland. The proposals face a struggle in parliament with only half the seats held in the Chamber of Deputies by ruling coalition parties.

In late March 2007, Prime Minister and Nobel prize winner Jose Ramos-Horta of East Timor set forth a tax reform plan designed to encourage the local business sector, attract foreign investment, largely from Australia, and create jobs. Ramos-Horta plans to transform East Timor into a free-trade nation, with no tariffs, sales tax, or excise taxes save on dangerous substances. He proposes to set personal and corporate income tax rates at the same flat rate between 5 and 10%. His proposal is being drafted into law based on consultations with the World Bank, the United Nations Development Program, academics, and the International Monetary Fund. Although the IMF had pushed for a flat rate between 15 and 20% to prevent East Timor from becoming a tax haven, the availability of oil revenue permits a lower rate, which minimizes the need to spend resources on tax collection.

2008-11-28T09:05:00.001-08:00

Estonia Plans to Reduce its Flat-Tax Rate

March 26, 2007

By Alvin Rabushka

Estonia was the first country in Central and Eastern Europe to enact a flat tax on personal and business income. Taking effect on January 1, 1994, the rate was set at 26%. Since then the rate has been lowered to 22% and the corporate profits tax abolished, except for distributed dividends that are taxed as personal income at the flat rate.

Estonia held its most recent national election on March 4, 2007. The Reform Party of Prime Minister Andrus Ansip secured the most votes with 27.6% of the electorate, many of whom voted on line in Estonia’s highly-wired society. The parties holding coalition talks include the Reform Party, the Pro Patria Party of former Prime Minister Mart Laar, the Green Party, and the Social Democratic Party.

The Baltic News Service reported on March 13, 2007, that the four Estonian parties agreed on tax reform that would reduce the flat-tax rate to 18% and raise the monthly tax-free allowance to 3,000 kroons ($254) by 2011.

The leading Reform Party does not plan to stand still at 18%. On page 35, in an article published in the Finnish business magazine Talouselämä on March 9, 2007, Secretary-General Kristen Michal of the Reform Party stated that it was Prime Minister Ansip’s goal to lift Estonia to one of the five wealthiest countries in Europe. How was this to be done? The first item in his list of economic measures was to reduce the flat-tax rate to a much lower 12%.

Estonia’s budget has been in surplus in each of the last five years. Revenues are growing at double-digit rates. At a conference held in Tallinn on August 28, 2006, sponsored by the Finnish Business and Policy Forum EVA, Prime Minister Ansip was asked if he would like to add extra brackets to the country’s tax system to make it more progressive like Finland. Ansip replied that his government’s revenues had increased 22% and 15% respectively in the past two years, which made it difficult for him to complain about Estonia’s flat tax. Indeed, his biggest problem was how to spend public money wisely, without waste.

2008-11-28T09:03:00.000-08:00

The Flat Tax Spreads to Mongolia

January 30, 2007

By Alvin Rabushka

In 2006, Mongolia’s parliament enacted a far-reaching tax reform. Effective January 1, 2007, personal income is taxed at a 10% flat rate, with a tax-free allowance of MNT (Mongolia Tugriks) 84,000 ($866/year). Previously, from May 1, 1997, personal income was taxed at three rates of 10, 20, and 40%, with the top rate reduced to 30% in 2004, and an allowance of 48,000 MNT ($495/year). The decision to adopt a 10% flat tax reflected several important principles of tax policy: decreasing the tax burden on individuals, reducing the underground economy, broadening the tax base, increasing the efficiency of tax collection, and improving compliance by clarifying and simplifying the tax laws.

In addition to the adoption of a 10% flat tax on personal income, the government of Mongolia also lowered its value-added tax from 15% to a flat 10%, and reduced the corporate income tax from two brackets of 15% and 30% to 10% and 25% respectively. Losses in revenue from reductions in the rates of personal, corporate, and value-added taxes are to be offset with an increase in taxes on the mining sector, and a tenfold rise in gambling tax.

2008-11-28T08:57:00.000-08:00

Flat and Flatter Taxes Continue to Spread Around the Globe

January 16, 2007

By Alvin Rabushka

The flat tax continued to pick up steam in 2006, spreading beyond Central and Eastern Europe.

On February 1, 2006, President Kurmanbek Bakiyev of Kyrgyzstan (Kyrgyz Republic) signed into law modifications in the country’s tax code that established a 10% flat tax. Kyrgyzstan’s flat tax replaced its current corporate tax of 20% and individual income tax rates between 10-20%. Shortly thereafter, the president of neighboring Kazakhstan said that his country would consider a flat tax in 2007.

In late May 2006 the government of Kuwait indicated that it was studying a proposal to introduce income tax at a flat rate of 10%. The draft law is to be studied by the cabinet and, if approved, sent to the country’s parliament for consideration.

In August 2006, Uzbekistan’s parliament adopted its budget for 2007, which provides for several significant tax cuts. The corporate rate will be set at 10% in 2007, down from 12% in 2006. Personal rates will be cut from 20% and 29% to 18% and 25% respectively.

On July 5, 2006, the people of Macedonia voted to establish their own country. The inaugural session of the new parliament met on July 26. President Branko Crvenkovski appointed a new prime minister, Nikola Gruevski, leader of the rightist VMRO-DPMNE, to establish a government. Gruevski announced a 100-point reform program. One of its main pillars is the flat tax. It was set at 12% beginning January 2007, and will be reduced to 10% a year in 2008. The flat tax will replace the current corporate tax of 15% and personal income tax rates between 15-24%. The government stated that the purpose of the low 10% flat tax is to make Macedonia a country with one of the lowest tax rates in Europe in order to emulate the success of Estonia, Latvia, and Lithuania, which experienced strong economic growth after the adoption of their flat taxes.

The tiny island of Mauritius, located in the Indian Ocean about 1,500 miles off the southeast coast of Africa, approved its 2006-2007 budget in July 2006. The signal feature of the budget is the advent, on July 1, 2009, of a 15% flat tax on personal and corporate income. The flat tax will replace the current personal income tax of two rates, 15% on taxable income to 25,000 rupees (about $800) and 25% on the rest. It will eliminate much of the complexity and many of the current deductions and credits in the current system. The 15% flat tax will also replace the existing 25% rate on corporate income.

Poland has moved three-quarters of the way to a flat tax. Apart from the taxation of wages and salaries, which are taxed at three rates of 19% (up to $12,340 annual taxable income), 30% ($12,340-24,680), and 40% (over $24,680), all other income in Poland is subject to a flat 19% rate. This includes corporations, self-employed individuals, capital gains, and dividends.

Montenegro, which achieved independence in a referendum in May 2006, has implemented a corporate tax rate of 9%, reduced from two rates of 15% and 20%, giving it one of the lowest corporate rates in Europe. Montenegro taxes personal income at graduated rates of 16% (€780-2,616 taxable income), 20% (€2,616-4,572), and 24% (over €4,572). It is likely that Montenegro will join its neighbors with an across-the-board flat tax sometime in the near future.

In Bulgaria, the standard rate of corporate income tax was set at 15% in 2006. Effective January 1, 2007, the rate was cut to 10%. Personal income is taxed at three rates of 20% ($1,440-1,500 taxable income), 22 ($1,500-4,800), and 24% (over $4,800).

If it forms a government with a parliamentary majority in 2007, a center-right coalition of three parties—the Civic Democrats (ODS), the Christian Democrats (KDU-CSL), and Greens—plan to enact a flat tax of 17-19% on companies and individuals. The flat tax would replace four brackets for individuals ranging from 12-32% and the corporate 24% tax.

Since January 1, 2007, Iceland taxes all personal income at a flat rate of 35.73%, which consists of the central government’s 22.75% tax rate and the municipal 12.98% tax rate. The central government surtax, levied at 7% during 1998-2003, gradually reduced to 2% in 2006, has now been eliminated. Interest, dividends, capital gains, and rental income are taxed at a 10% flat rate. A wealth tax was abolished at the end of 2005. The corporate tax rate is 18%, down from 30% in 2001. The rate on partnerships is down from 38% in 2001 to 26% in 2007.

On November 29, 2006, Spain promulgated significant changes in its tax laws. Income derived from savings is subject to a flat rate of 18%. Effective January 1, 2007, the company tax rate of 35% was reduced to 32.5%, and will fall further to 30% in 2008. Small and medium-sized companies experienced a drop in their tax rate from 30% to 25%. Personal income is taxed at four rates, with the top bracket cut from 45% to 43%.

Two other developments warrant mention. Guernsey, a British Crown dependency in the Channel Islands off the west coast of France, has had for many years a 20% flat tax on corporate and personal income. On July 10, 2006, its parliament approved a zero corporate tax rate and capped the maximum tax on individuals at £250,000. The cap means that tax rates decline once taxable income exceeds £1,250,000, transforming the territory’s flat tax into a degressive tax.

The Isle of Man, a Crown dependency located in the Irish Sea between Great Britain and Ireland, reduced its corporate tax rate for trading companies from 10% to zero beginning April 5, 2006. Personal income will continue to be taxed at two rates, 10% and 18%, but be capped at £100,000, reducing tax rates on those with incomes exceeding £570,000 a year.

2008-11-28T08:56:00.001-08:00

The Flat Tax at Work in Russia: Year Five, 2005

May 11, 2006

By Alvin Rabushka

The Ministry of Finance of the Russian Federation has reported provisional data for total taxes and revenues for the consolidated federal and regional budgets for 2005. The data show that the 13% flat tax on personal income continues to achieve very positive results.

In 2005, the ministry collected 707 billion rubles ($1 = R27) in personal income tax receipts, an increase of 23.1 percent over 2004. After adjusting for annualized consumer price inflation of 10.95% in 2004, real personal income tax revenue rose 10.9%. This builds on real ruble revenue increases of 25.2% in 2001, 24.6% in 2002, 15.2% in 2003, and 14.4% in 2004. Total real ruble revenue has increased 128 percent (more than doubled) in the five years since the 13% flat tax was implemented. It should be recalled that top marginal rate in 2000 was 30% before the implementation of the 13% flat tax on January 1, 2001. The low flat rate contributed to the decline in capital flight, improved taxpayer compliance, and increased revenue. To further the culture of compliance, several prominent Russians have been jailed on charges of tax evasion.

Other tax revenues have shown even healthier increases. In real ruble terms, after adjusting for inflation, corporate profits taxes rose 38.4%, value added taxes, 24%, taxes, dues and regular payments for the use of natural resources (severance tax), 44.4%, and taxes on external trade and foreign economic operations, 78.3%. The high price of oil and other natural resources accounts for the rapid growth in tax revenues from corporations, value added taxes, severance, and external trade. The remaining categories of excises, property taxes, and the single social tax declined.

The 13% flat tax has become a stable feature of Russia’s tax system. With the rise in real incomes percolating through the economy, receipts continue to grow at a healthy clip.

2008-11-28T08:54:00.000-08:00

A Competitive Flat Tax Spreads to Lithuania

November 2, 2005

By Alvin Rabushka

On June 7, 2005, Lithuania’s Parliament approved a major reduction in the country’s personal income tax law, cutting the 33% flat rate on wages and salaries to 27% from July 1, 2006, and to 24% from January 1, 2008. This puts the country’s flat-tax rate in line with Estonia, currently 24%, which is scheduled to fall by one percent over each of the next four years to 20% by 2009, and Latvia, which has a flat rate of 25%. A 15% flat rate on royalties, interest, and other sources of income remains unchanged.

Earlier, on March 24, 2005, Prime Minister Algirdas Brazaukas stated that his country planned to make this move “to bring Lithuania in line with other countries in Central and Eastern Europe that either have low flat tax rates or intend to implement them.” The stated reasons for the approved reduction in the flat rate from 33% to 24% over the next three years are (1) to increase the competitive ability of Lithuania in the region and the country’s attractiveness to foreign investors, (2) reduce tax evasion and avoidance, and (3) lower the tax burden on individuals.

With a flat rate of 24%, Lithuania becomes the ninth country in Central and Eastern Europe to adopt a low flat tax. The others are Estonia and Latvia, mentioned above, Russia and Ukraine at 13%, Slovakia at 19%, Serbia at 14%, Romania at 16%, and Georgia at 12%.

Movements for a flat tax are currently on hold in Poland and Germany, but remain active for a 15% flat tax in the Czech Republic and Croatia, and a 20% flat tax in Slovenia. There is strong support for a 20% flat tax among the younger members of the Flemish Liberal Democrats, the largest party in a coalition of seven political parties that governs Belgium under Prime Minister Guy Verhofstadt.

2008-11-28T08:51:00.000-08:00

The Flat Tax Gathers Momentum in Western Europe

August 30, 2005

By Alvin Rabushka

Since 1994, the flat tax has become an integral part of the fiscal landscape in Central and Eastern Europe, from Estonia in the North, to Russia in the East, Georgia in the South, and Slovakia in the West. They are joined by Latvia, Ukraine, Serbia, and Romania. The number is likely to rise in the next year or two with Poland and the Czech Republic joining the bandwagon. Interest is also growing in Hungary and Croatia. Paint Central and Eastern Europe flat!

Suddenly, the flat tax is germinating in Western Europe, home to governments that generally profess the “social market economy” of high taxes and redistribution of income. Slow growth and unemployment seems to be changing minds. The flat tax is currently the centerpiece of tax policy debate in Germany, the United Kingdom, Greece, and Italy.

First, Germany. Angela Merkel, leader of the Christian Democratic Party and likely to become Germany’s new chancellor on September 18, announced the appointment of Professor Paul Kirchhof to her campaign team in late August. Kirchhof, who could become finance minister in the new German government, is known for his advocacy of a comprehensive 25% flat tax, which would replace the current system of three rates of personal income tax with a top marginal rate of 40%, and 25% on corporations. Kirchhof argues that a flat tax would help reverse Germany’s long period of low growth and high unemployment. This is not the first time that the flat tax has been advocated in Germany. Over a year ago, on July 27, 2004, a Finance Ministry twenty-nine member panel of academics, chaired by Professor Wolfgang Wiegard of Regensburg University, head of Germany's independent Council of Economic Advisers, proposed a 30% flat tax on all personal and corporate income.

Next, the United Kingdom. Gordon Brown, chancellor of the exchequer, recently came under fire for the Treasury’s cover-up of a report on the pros and cons of a flat tax. It blacked out segments of the report indicating the benefits of a flat tax, only releasing the sections describing its defects. A copy of the full report leaked to the media shows that a reduction in tax rates and burdens would stimulate further economic growth, and that the elimination of credits and exemptions would reduce avoidance and evasion. Leaders of the opposition Conservative and Liberal Democratic parties have appointed commissions to report this autumn to their parties on the desirability of a flat tax. Conservative shadow chancellor George Osborne visited Estonia earlier this year to observe its flat tax in operation and stated that the United Kingdom should consider its example.

Third, in mid-August, Greek media reported that the prime minister, Costas Karamanlis, and finance minister, Giorgios Alogoskoufis, are likely to announce at the Thessaloniki International Fair in early September a plan to introduce a 25% flat tax to replace the current system of three rates with a top rate of 40%.

In late August, debate broke out on the flat tax in Italy. Defense Minister Antonio Martino, formerly professor of monetary history and policy at the University of Rome and professor of economics (on Parliamentary leave) at LUISS University, indicated his support for a flat tax in an interview with the Bruno Leoni Institute. He was supported by the prime minister’s economic adviser, Renato Brunetta, also a professor of economics. Professor Martino is not a newcomer to the flat tax. In November 1981 he hosted a presentation I made on the flat tax to students at LUISS University. In 1985 he published an Italian pamphlet entitled “Simplificare L’Imposta Sul Reddito,” Una proposta di Robert E. Hall e Alvin Rabushka, which was a translation of the plan presented in the first book I co-authored with Robert E. Hall, Low Tax, Simple Tax, Flat Tax. Professor Martino wrote an introduction to the Italian pamphlet explaining how the Hall-Rabushka flat tax could be applied to Italy.

A complete roundup of Western Europe would include Denmark and Finland, where small political parties are expressing their interest in the flat tax, and Spain, where two professors who serve as economic advisors to the prime minister have written a paper supporting a flat tax for Spain. It’s too early to predict the adoption of the flat tax in any or all of these countries, but the idea has clearly taken root.

2008-11-28T08:49:00.000-08:00

The Flat Tax May Spread to the Commonwealth of Puerto Rico (Only One Thousand Miles Southeast of Miami)

June 6, 2005

By Alvin Rabushka

On January 18, 2005, Anibal Acevedo Vilá was installed as governor of Puerto Rico. Puerto Rico, a Commonwealth in association with the United States, enjoys considerable autonomy in matters of taxation. Two weeks later, the governor established a Special Commission for Fiscal Reform (known as CERF by its Spanish acronym), instructing it to analyze Puerto Rico’s tax system and make recommendations for reform.

CERF delivered its report on April 30. It recommended a 10-10-10 comprehensive reform of Puerto Rico’s tax system.

1. A 10% flat tax on individuals, a marked reduction from the current top marginal 33% rate, which can reach 38% in certain conditions. Single taxpayers with annual income up to $15,000 would be exempt, as would married working couples with annual income up to $30,000. These levels would exempt 309,000 taxpayers from personal income tax, up from 180,000 under current law. Most of the newly-exempt would be taxpayers with annual income below $20,000. The 10% flat tax on individuals eliminates the taxation of poor persons.

CERF recommends that taxpayers be permitted to deduct mortgage-interest payments for their principle residence up to 30% of adjusted gross income. Additional deductions include contributions to retirement accounts, savings for dependents’ education, and charitable donations. Taxpayers with more than $150,000 in reported income would only be able to deduct mortgage interest up to 20% of adjusted gross income, adding an element of progressivity to the system. No deduction would be permitted for social security and unemployment taxes (as in the mainland U.S.). Taxpayers with income of $100,000 or less would receive a tax credit of $500 per family member.

Individuals would pay 10% on dividends received from corporations, a small double tax after corporations pay 10% on business profits.

CERF estimates that the 10% flat tax would collect $1.25 billion, a reduction below the $2.8 billion paid in personal income tax in 2004. Personal income tax would fall from 36% of total revenue to 12%.

2. A 10% flat tax on corporations. Only about 35,000 of the 140,000 registered corporations file tax returns. Local corporations are subject to a 39% tax rate, while companies operating under the Puerto Rico Industrial Incentive Act (PRIIA) pay 0% to 7% in taxes. The uniform 10% rate is designed to refine the strategy of the PRIIA. Companies paying the proposed 10% tax would be able to take it as a federal deduction when profits are repatriated to the U.S. mainland. The corporate tax reform would double revenue from $2.4 billion to $5.7 billion.

Companies would receive tax credits for employment creation, infrastructure improvement, productivity, continuing employee education, environmental protection measures, and efficient energy use, which would reduce their effective tax burden.

3. A 10% consumption tax, reduced to 9% after five years, which would replace a 6.6% general excise tax. The current excise tax cascades from importer to wholesaler to retailer, resulting in higher prices for consumers. The 10% consumption tax would be a hybrid VAT that could be implemented in less than a year. Exempt items would include prescription drugs, raw and intermediate manufacturing materials, educational products, and real estate services. Special excise taxes would remain on gasoline, alcoholic beverages, cars, and jewelry. To minimize the regressiveness of the consumption tax, a “Social Fairness Fund” would be established to compensate families based on their income and spending capabilities.

The 10% consumption tax is projected to raise $3 billion, which would be added to the $1.2 billion raised in special excise taxes.

Altogether, CERF estimates that the reforms would result in tax revenue of $12.5 billion. After returning $2.5 billion in corporate tax credits and compensation to low-income and poor residents through the Social Fairness Fund, $10 billion would remain—$2 billion more than the government collected in 2004. The additional revenue, which would be collected from upper-income households and corporations, would stem from closing loopholes, and reducing evasion and avoidance.

CERF’s report was printed only in Spanish. The English summary presented in the May 20, 2005, issue of Caribbean Business does not indicate how interest and capital gains would be taxed, and how corporations would depreciate investment.

2008-11-28T08:48:00.000-08:00

A Competitive Flat Tax May Spread to Lithuania

March 24, 2005

By Alvin Rabushka

The flat tax revolution spreading through Central and Eastern Europe was launched in Estonia in 1994, with a rate of 26%. Estonia has since reduced the rate to 24% this year, with plans for 22% in 2006, and 20% in 2007. Since Estonia’s adoption of the flat tax, Latvia, Russia, Serbia, Ukraine, Slovakia, Romania, and Georgia have joined the movement. Details of each country’s flat tax have been chronicled in these Comments and Articles.

Thus far I have omitted Lithuania from this list. To be sure, Lithuania levies a 33% flat rate on wages and salaries. This rate is way too high to be competitive with other flat tax countries in the region. Apart from wages and salaries, Lithuania imposes a hodge-podge of rates on other sources of income: 20% on rent and self-employment income, 20% on salary from a foreign company in Lithuania, 29% on dividends, 20% on director’s fees. Corporation income is taxed at 15%, but agricultural products are exempted altogether. Companies with fewer than ten workers and turnover of less than Euro 144,810 are taxed at 13%. It is this multiplicity of rates, combined with the high 33% on wages and salaries, that has kept Lithuania off my list of flat tax countries.

All this may change in the near future. On March 24, 2005, United Press International reported that Lithuanian Prime Minister Algirdas Brazaukas stated his government’s intention to phase in a flat-rate income tax of 24% by 2008. He said “the move was being considered to bring Lithuania in line with other countries in Central and Eastern Europe that either have low flat tax rates or intend to implement them.”

Adoption of a 24% flat tax by Lithuania would make a clean sweep of the Baltics and increase the pressure on the remaining holdouts in the region to follow suit.

2008-11-28T08:47:00.000-08:00

The Flat Tax May Spread to Poland Sooner than Expected

March 17, 2005

By Alvin Rabushka

For some time, the opposition Civic Platform party in Poland has proposed a 15% flat tax on individuals and corporations to replace the country’s current income tax system. Personal income tax in Poland is assessed at three rates: after a tax-free threshold of about PLN 37,000 (zlotys), (about $12,200 at the current exchange rate of PLN 3.03 = $1), a rate of 19% is levied on taxable income up to PLN 37,027, 30% on the next PLN 37,024, and 40% on all income exceeding PLN 74,040. The current corporate tax rate is 19%. Elections are scheduled to be held later this year, which would permit the Civic Platform, if it emerges victorious, to implement a 15% flat tax beginning January 1, 2006.

Perhaps the country will not have to wait for a new election for the flat tax. The Telegraph of the United Kingdom reported on March 16, 2005, that the ruling center-left Polish government plans to enact a flat tax, joining the flat-tax revolution spreading throughout Central and Eastern Europe. Poland’s minister of finance, Mirosaw Gronicki, is proposing an 18-18-18 solution: 18% flat rate on individuals, 18% on corporations, and 18% value-added tax (four percentage points less than the current standard 22% rate). The personal income tax will likely retain the current tax-free threshold.

The Civic Platform is likely to argue that its lower 15% rate would give Poland a competitive edge against Slovakia’s 19% rate and newly-enacted Romania’s 16% rate. Regardless of what rate is enacted, it’s clear Poland feels the pressure of its neighbors in the quest for investment and jobs.

Poland is the largest of the new European Union countries. Its adoption of the flat tax will increase the pressure on the remaining holdouts in the region—Belarus, Bulgaria, Croatia, Czech Republic, Hungary, Macedonia, Slovenia, Belarus, and Moldova—to respond quickly in kind, and Lithuania to get serious about slashing its high 33% rate on wages and salaries. It will certain get the attention of Germany and France, and, after that, who knows?

2008-11-28T08:46:00.000-08:00

The Flat Tax at Work in Russia: Year Four, 2004

January 26, 2005

By Alvin Rabushka

On January 25, 2005, the Ministry of Taxation of the Russian Federation reported total taxes and revenues for the consolidated federal and regional budgets for 2004. The data show that the 13% flat tax on personal income continues to achieve very positive results.

In 2004, the ministry collected 574.1 billion rubles ($1 = R28) in personal income tax receipts, an increase of 26.1% over 2003. After adjusting for annualized consumer price inflation of 11.7% in 2004, real personal income tax revenue rose 14.4%. This growth builds on real ruble revenue increases of 25.2% in 2001, 24.6% in 2002, and 15.2% in 2003. For the four years, compound real ruble revenue increased 105.6%.

The 26.1% nominal growth in personal income tax receipts outpaced the overall 24.7% rise in total taxes and fees in 2004. As a share of total taxes and revenue, it rivals payments for use of natural resources, is more than double excises, and now stands at 76.6% of value added tax. The most dramatic change in 2004 is the 64.5% rise in nominal rubles, or 52.8% in real rubles, in corporate taxes. This is due to stepped up enforcement, exemplified in Yukos and other corporate cases, which has produced a new enthusiasm among corporate heads for compliance.

Consolidated tax receipts are divided between the federal and regional budgets. Personal income tax revenue is allocated entirely to regional budgets. It now supplies 31.9% of regional revenue, making regional governments the main beneficiaries of the 2000 personal income tax reform.

2008-11-28T08:45:00.000-08:00

The Flat Tax Spreads to Georgia

January 3, 2005

By Alvin Rabushka

On December 22, 2004, by an overwhelming vote of 107 to 11, Georgia’s parliament adopted a new tax code. It slashed the size and weight of the code by about 95%. Key to the new legislation is the adoption of a 12% flat income tax. Effective January 1, 2005, it replaces the previous system which taxed personal income at four rates: 12% on income exceeding 200 Georgian laries, 15% between 201 and 350 laries, 17% between 351 and 600 laries, and 20% above 600 laries, with each individual receiving a monthly deduction of 9 laries per year. ($1 equals GEL 1.7784, an appreciation of 17.5% from GEL 2.156 in January 2004).

Adoption of the flat tax honors the pledge made by President Mikhail Saakashvili five days after his inauguration on January 25, 2004, when he stated that one of his new government’s top two economic priorities was to introduce a new flat-rate tax system.

The new tax code retains the former 20% profit tax rate, but cuts the rate on social insurance from 33% to 20% and VAT from 20% to 18%.

Dividends and interest payments will be taxed only once at 10% at the source of payment. Georgian enterprises and individuals that receive dividend and interest payments will not pay a second tax.

Adoption of the flat tax in Georgia extends the list of countries that have adopted the flat tax to seven. The chronology is Estonia (1994: 26% to be reduced to 20% in 2007); Latvia (1995: 25%), Russia (2000: 13%); Serbia (2003: 14%); Ukraine (2004: 13%); and, Slovakia (2004: 19%).

The choice of 12% was to insure the most competitive flat rate in Central and Eastern Europe.

2008-11-28T08:34:00.000-08:00

The Flat Tax Spreads to Romania

January 3, 2005

By Alvin Rabushka

In an election held on December 13, 2004, Trajan Basecu, the mayor of Bucharest, won a surprise victory as president of Romania. His candidacy of the “Justice and Truth” coalition formed by the National-Liberal Party and the Democrat party was based, in part, on the introduction of a 16% flat tax on personal income and business profits. Following the election, the coalition was joined by the Humanistic Party and the Hungarian Democratic Union of Romania. Together the coalition controls 242 of the 469 seats in parliament, a clear majority. On December 26 Basecu named his 24-member cabinet headed by Calin Popescu Tariceanu as prime minister and 40-year-old economist Ionut Popescu as public finance minister. Parliament promptly approved the cabinet on December 28.

President Basecu emphasized his desire to make the 16% flat tax effective on January 1, 2005. Cabinet members took their oath of office early in the morning of December 29. The new prime minister, using a special ordinance, installed the flat tax of 16% on personal and business income to be enforced starting January 1, 2005. Had the cabinet and parliament waited until the new year to enact new tax legislation, the flat tax would not have taken effect until 2006.

The 16% flat tax replaces the former personal income tax, which imposed five rates: 18% on taxable income up to 28,000,000 Romanian Lei ($969.05), 23% on income between ROL 28,000,001 and 69,600,000 ($2,408.80), 28% between ROL 69,000,001 and 111,600,000 ($3,862.40), 34% between ROL 111,600,001and 156,000,00 ($5,399.05), and 40% over ROL 156,000,000. (US$1 = ROL 28,894) The 16% flat tax also reduces business profits tax from 25%. Further details on the new 16% flat tax will be posted to this site as they become available.

Romania’s decision to adopt a low flat tax reflects fiscal competition from other Central and Eastern European countries that have adopted the flat tax: Estonia, Latvia, Russia, Serbia, Ukraine, Slovakia, and Georgia. I have omitted Lithuania, which has a 33% flat rate on wage and salary income, from this list because its tax system imposes a wide variety of rates depending on source of income.

Other countries are waiting in the wings. The likelihood of a flat tax in these countries depends on the elections that will be held in the coming years. The shadow finance minister of the Czech Republic, Vlastimil Tlusty of the Civic Democratic Party, is urging his country to follow suit. His party has drawn up plans for an integrated 15% flat tax on corporations and individuals, a reduction from the current top rates of 29% and 31% respectively. The Civic Platform in Poland has also proposed a 15% flat tax on both personal and corporate income.

2008-11-28T08:32:00.000-08:00

The Flat Tax at Work in Russia: Year Four, January-June 2004

July 19, 2004

By Alvin Rabushka

The Ministry of Taxation of the Russian Federation has reported the taxes and fees collected for the period January-June 2004. The data show that the 13% flat tax on personal income continues to achieve very positive results.

During January-June 2004, the Ministry of Taxation collected 252.4 billion rubles ($1 = R29.1) in personal income tax receipts, an increase of 27.7% over the comparable period in 2003. After adjusting for annualized inflation of about 11-12% in the first half of 2003, personal income tax revenue rose at an annualized real rate of about 16% in the first half of 2004 as against the same period in 2003. This growth builds on real ruble revenue increases of 25.2% in 2001, 24.6% in 2002, and 15.2% in 2003. If real ruble revenues rise at about 16% for all of 2004, total real receipts from the personal income tax will have more doubled over four years—despite a reduction in the top rate from 30% in 1999 to 13%. (See “The Flat Tax at Work in Russia: Year Three.”)

The 27.7% nominal growth in personal income tax receipts continues to outpace the overall rise in taxes and fees collected by the Ministry of Finance, which grew by a less robust 17.9% for January-June 2004 compared with the same period in 2003. The 13% flat tax on personal income has steadily grown in importance as source of revenue during the past three-and-a-half years.

(Angela and Diana Kniazeva, graduate students in the Department of Economics, Stern School of Business, New York University, kindly provided research assistance for the preparation of this article)

2008-11-28T08:31:00.000-08:00

The Flat Tax in Iraq: Much Ado About Nothing—So Far

May 6, 2004

By Alvin Rabushka

Supporters and opponents of the flat tax have spilled considerable ink debating the merits of a 15% flat tax on personal income in Iraq that was implemented on January 1, 2004. Supporters of the idea believe that what’s good for the Coalition Provisional Authority (CPA) goose in Iraq is good enough for the U.S. Congressional gander. Opponents criticize the low 15% flat tax as a giveaway to the rich. Both groups, in the bard’s words, make “much ado about nothing,” at least so far.

It is instructive to examine the 2004 budget of the Republic of Iraq, which is posted on the CPA’s web site. Estimates in the draft October 2003 budget for calendar year 2004 projected oil revenue of New Iraqi Dinars (NID) 18,000 billion, or US$11.96 billion, constituting 93.5% of total revenue. (US$1=NID 1,505 in October 2003.) The share of revenue for 2005 and 2006 was projected at 96.4% and 97.7% respectively.

Other sources of revenue in 2004 include the reconstruction levy (NID 450 billion), the 15% personal income tax, or PIT (NID 15 billion), a 15% corporate income tax, or CIT (NID 30 billion), interest income (NID 15 billion), transfers from state-owned enterprises, or SOEs (NID 562.5 billion), user fees (NID 96.3 billion), and other taxes and charges (NID 90 billion). The reconstruction levy is a 5% charge on all goods, except humanitarian goods, imported into Iraq from January 1, 2004, to expire after two years.

The draft budget noted that the 15% PIT rate, a reduction from the previous top 75% rate, would encourage compliance and reward effort. The CIT rate of 15% applies to the profits of both domestic and foreign companies operating in Iraq. Transfers were projected for only a handful of the nearly two hundred state-owned enterprises. User fees and charges are to cover vehicle registration, emergency services, passport fees, higher education course fees, court fees, social security rental income, with flight overpass fees, entry fees to cultural institutions, consultancy fees, and sales of statistical publications added later. The remaining category of other taxes includes a 15% excise tax on alcohol and tobacco, a 10% tax on 4 and 5 star hotel accommodation and restaurants, a real estate transfer tax, and other smaller taxes including those collected by regional governments.

The 15% PIT was projected to rise from NID 15 billion in 2004 to NID 45 billion in 2005 and NID 90 billion in 2006. The share of total revenue to be contributed from the PIT is 0.078% in 2004, 0.16% in 2005, rising to 0.30% in 2005. The projected rise in the 15% CIT is from NID 30 billion to NID 75 billion and NID 150 billion over the same period, constituting 0.16%, 0.26%, and 0.30% respectively of total revenue.

Due to a marked improvement in fiscal circumstances over the original October 2003 budget, the Ministry of Finance issued revisions to the 2004 budget on April 10, 2004. It identified greater than expected net capital inflows of Iraqi Dinars (ID) 750 billion and additional revenue from all other sources of ID 2,470.3 billion. (US$1=ID 1,476 on April 10, 2004.) The first increase is due largely to a lower-than expected need for central bank reserves, which has reserves exceeding ID 2,250 billion. Given the appreciation of the Iraqi Dinar, no requirement for greater reserves is foreseen, permitting the cancellation of an ID 1,350 billion transfer from the budget to the Central Bank. Transfers of assets from abroad (ID 300 billion from Jordan) also added to the net figure, which was reduced by a shift of ID 900 billion in refunds from the oil-for-food program from 2004 to the 2003 budget.

The second increase of ID 2,470 billion is due largely to higher oil prices, generating an extra ID 3,262.9 billion. Partially offsetting higher oil revenues are a reduction of ID 277.5 billion in the reconstruction levy due to its late implementation, the postponement of the CIT for the year, a 50% cut in estimated PIT receipts of ID 7.5 billion, a reduction of ID 562.5 billion in transfers from SOEs, and reduced receipts from excise and land taxes. Anticipated receipts of ID 7.5 billion in PIT revenue will underwrite a mere 0.02% of projected expenditure of ID 29,889.8 billion in 2004 (which is higher by ID 9,756.3 billion than in the October 2003 draft budget due to a higher starting balance in uncommitted funds from the previous year).

Oil revenues in 2004 are estimated on the basis of a gradual fall in net oil price to US$21 (ID 31,000) a barrel in June 2004, assuming production of 1.9 million barrels per day by the end of the year. Higher prices and greater exports would generate a notable increase in net revenue. In early May 2004, the price of top quality crude oil reached about $40 a barrel with Iraqi oil exports exceeding April’s estimates. If prices for the year average well above $21 a barrel and exports exceed 1.9 million barrels a day, it is likely that PIT revenue will contribute in the neighborhood of 0.01% of total revenue.

It is a stretch, as many have done, to credit or criticize a 15% flat tax based on its negligible role for some time to come in generating revenue or stimulating economic activity. It remains to be seen if even ID 7.5 billion will be collected in 2004, or if any effort is made to enforce compliance. PIT revenue amounting to one or two-hundredths of one percent of total revenues is hardly a topic about which to crow or complain. Paul Krugman, please take note!

2008-11-28T08:30:00.000-08:00

The Flat Tax at Work in Russia: Year Three

April 26, 2004

By Alvin Rabushka

On January 1, 2001, a 13% flat-rate tax on personal income took effect in Russia. (The general principles and beneficial economic effects of the flat tax appear in The Flat Tax.) Russia’s 13% flat tax replaced a three-bracket system, which imposed a top rate of 30% on taxable income exceeding $5,000. The flat tax has been remarkably successful by every conceivable measure, and has encouraged such other countries as Serbia (2003), Ukraine (2004), and Slovakia (2004) to implement flat taxes of their own. Political parties in Poland, the Czech Republic, and Georgia have announced their support for the flat tax and there is interest in Bulgaria and Romania. Even China has taken the step of translating The Flat Tax into Chinese for consideration by the Ministry of Finance.

Let’s review Russia’s 13% flat tax since its implementation on January 1, 2001. In 2001, personal income tax (PIT) revenue totaled R255.5 billion, an increase of 46.7% in nominal rubles, or 25.2% in real rubles after adjusting for inflation of 21.5%. PIT revenue as a share of consolidated budget tax revenue rose from 12.1% in 2000 to 12.7% in 2001. Since economic growth of 5.1% in 2001 was lower than the post-Soviet record 10.0% growth in 2000, the rise in revenue cannot be attributed solely, or even largely, to growth in 2001. (For a detailed treatment of Russia’s 13% flat tax, see “The Flat Tax at Work in Russia.”)

In 2002, PIT revenue amounted to R357.1 billion, an increase of 39.7% over 2001. After adjusting for inflation of 15.1%, real revenue rose 24.6%, supplying 15.3% of the consolidated budget. GDP growth in 2002 was 4.7%, a small decline over 2001. (See “The Flat Tax at Work in Russia: Year Two.)

In 2003, PIT revenue generated R449.8 billion, a nominal gain of 27.2% over 2002. After adjusting for inflation of 12.0%, real revenue increased 15.2%, supplying 17% of consolidated budget revenue. GDP growth in 2003 was a more robust 7.3%. Only corporate income tax and value added tax generated more revenue than the PIT.

The composition of PIT revenue in 2003 was as follows: taxes assessed on income at the 13% rate generated 96.9% of all PIT revenue; taxes on dividends, assessed at a higher 30% rate, 1.9%; and taxes on non-residents and individual entrepreneurs, 0.9%.

In the three years since the top rate of PIT was reduced from 30% to 13%, real flat tax revenue has risen by 79.7%. Russia’s budget is relatively healthy. Tax compliance has improved. And incentives to work, save, and invest remain strong.

(Anjela and Diana Kniazeva, graduate students in the Department of Economics, Stern School of Business, New York University, provided research assistance for the preparation of this article.)

2008-11-28T08:28:00.002-08:00

The Flat Tax Spreads to Serbia

March 23, 2004

By Alvin Rabushka

On January 1, 2003, the government of Serbia implemented a comprehensive 14% flat-tax reform. Enacted in November 2002, it replaced the previous three-rate, graduated personal income tax system that had been enacted and revised between 1994 and 2001. Assessed on individual employees or self-employed persons, the previous system imposed a rate of 10% on taxable income up to Serbian Dinars (CSD) 60,000, 15% on taxable income between CSD 60,000 and CSD 120,000, and 20% on taxable income exceeding CSD 120,000. The tax rate on investment income was assessed at the highest rate of 20%. (As of March 22, 2004, US$1 = CSD 55.56)

The new system imposes a flat rate of 14% on labor income, and income from agriculture, forestry, and self-employment, previously taxed at 20%. Withholding tax on salaries is set at 14%. The new law includes an allowance for adults and children, retirement contributions up to twice the average monthly salary paid per employee in Serbia, and redundancy payments determined by the labor law of the Republic of Serbia.

Additional tax on income above CSD 600,000 ($10,799) was reduced from 20% to 10%, which makes for a combined maximum rate of 24%. This exception to an otherwise uniform flat tax affects a very small percentage of the population.

The new laws also reduced the corporate profit tax rate from 20% to 14%, giving Serbia the lowest corporate profit tax rate in Europe. This eliminates any interest in choosing to incorporate for tax benefits since the personal and corporate tax rates are the same. In addition to a reduction in the corporate tax rate, for the five years beginning January 1, 2003, large investments in underdeveloped areas exceeding CSD 600 million and employing more than 100 workers will receive an exemption on corporate income tax for ten years.

The government has stated its intention to further reduce taxes on income in the near future, with the reduction to be made up by a lottery tax.

It should be noted that Serbia preceded Slovakia’s implementation of a 19% flat tax and Ukraine’s 13% flat tax by a full year.

2008-11-28T08:28:00.001-08:00

The Flat Tax Might Spread to Georgia

February 3, 2004

By Alvin Rabushka

Georgia’s new president, Mikhail Saakashvili, was inaugurated on January 25, 2004. Five days later, speaking before the anti-corruption group Transparency International in Berlin, he stated his new government’s top two economic priorities. The first is to introduce a new flat-rate tax system. The second is to create incentives for foreign investors.

Saakashvilli noted in his remarks that Georgia had far more tax officials than his small country needed. He wants to reduce the scope and size of the tax collection apparatus and reduce the disincentives of the current tax system.

The current system of personal income taxation is based on the Georgian Taxation Code of 1997. Personal income is taxed at four rates: 12% on income exceeding 200 Georgian laries, 15% between 201 and 350 laries, 17% between 351 and 600 laries, and 20% above 600 laries. Each individual receives a monthly deduction of 9 laries per year. ($1 equals GEL 2.156) The president did not indicate any specific flat rate in his address. If Georgia’s neighbors of Russia and Ukraine are a model, the rate could be set as low as 13%.

Adoption of a flat tax in Georgia would add one more country to a growing list that has adopted a flat tax. The chronology is Estonia (implemented in 1994), Latvia (1995), Russia (2001), Ukraine (2004), and Slovakia (2004).

2008-11-28T08:26:00.000-08:00

The Flat Tax Spreads to Slovakia

November 3, 2003

By Alvin Rabushka

On October 28, 2003, Slovakia’s parliament enacted a 19% flat tax on both individual and corporate income to take effect on January 1, 2004. The measure passed by a vote of 85 to 48, with five abstentions, and garnered the support of some opposition deputies. The 19% flat tax on individual income replaces five brackets of 10, 20, 25, 35, and 38%. The flat tax greatly simplifies the current individual income tax which includes 90 exceptions, 19 sources of income that are not taxed, 66 items that are tax exempt, and 27 items with their own specific tax rates (e.g, bank interest, honoraria, etc.). The 19% tax rate on corporate income replaces the current rate of 25%. Once the corporate tax is paid, there will no tax on dividends received by individuals.

The 19% flat tax on individuals includes a personal exemption of Slovak Crowns or Koruna (SKK) 80,832, about $2,300, which is equivalent to six times average month salary. This is a rise from the current level of SKK 38,760, about $1,100 or 2.9 times average monthly salary. Under current law, gross income up to SKK 90,000 is taxed at a rate of 10%. The 20% tax bracket takes effect on income between SKK 90,000 and 180,000. Raising the exemption to SKK 80,832 virtually eliminates the increase in income tax due to the elimination of the 10% tax bracket. Each year, the exemption will be increased to equal 19.2 times the minimum monthly living standard, amounting to SKK 4,210 ($120) in 2004.

Along with the flat-rate income tax, a 19% VAT will take effective on January 1, 2004.

Slovakia adds one more country to a growing list that has adopted a flat tax. The chronology is Estonia (implemented in 1994), Latvia (1995), Russia (2001), Ukraine (2004), and now Slovakia (2004).

2008-11-28T08:25:00.000-08:00

The Flat Tax at Work in Russia: Year Three, January-June 2003

August 13, 2003

By Alvin Rabushka

The Ministry of Taxation of the Russian Federation has reported the taxes and fees collected for the period January-June 2003. The data show that the 13% flat tax on personal income continues to achieve very positive results.

During January-June 2003, the Ministry of Taxation collected 197.6 billion rubles in personal income tax receipts, an increase of 31.6% over the comparable period in 2002. Inflation during the first half of 2003 was 7.9%. Assuming annual inflation of about 15% for all of 2003, personal income tax revenue rose at an annualized real rate of 16.6% in the first half of 2003 as against the same period in 2002. This growth builds on real revenue increases of 28% in 2001 and 20.7% in 2002.

The 32.6% nominal growth in personal income tax receipts continues to outpace the overall rise in taxes and fees collected by the Ministry of Finance, which grew by a less robust 17.5% for January-June 2003 compared with the same period in 2002. In percentage terms, personal income tax receipts grew more rapidly than both corporate profit tax and VAT. The 13% flat tax on personal income has steadily grown in importance as source of revenue during the past two-and-a-half years.

2008-11-28T08:23:00.001-08:00

The Flat Tax Spreads to Ukraine

May 27, 2003

By Alvin Rabushka

On May 22, 2003, Ukraine’s parliament, taking a page from Russia’s playbook, overwhelmingly voted into law a 13% flat tax on personal income to take effect on January 1, 2004. (See “The Flat Tax at Work in Russia”) The 13% flat tax replaces five brackets of 10, 15, 20, 30, and 40%. Dividends and interest on bank deposits will be taxed at a lower 5% rate beginning January 1, 2005. Following further in Russia’s footsteps, the tax rate on company profits was previously reduced, from 30% to 25% (see “Further Extending Russia’s Tax Reforms”). Ukraine’s finance minister is also seeking a reduction in VAT, from 20% to 15%.

News reports suggest that Ukraine officials consulted with their Russian colleagues. The advice they received was that incentives and revenue would rise and the underground economy and tax evasion would decline (see “The Flat Tax at Work in Russia: Year Two”).

Ukraine adds one more country to a growing list that have adopted a flat tax. The chronology is Estonia (implemented in 1994), Latvia (1995), Russia (2001), and now Ukraine (2004). Belarus intends to harmonize its tax code with Russia. A bill for a 20% flat tax (perhaps as low as 15%) on personal income is before Slovakia’s parliament in May 2003.

The opposition ODS - Civic Democratic Party in the Czech Republic has drawn up plans for a 15% flat tax on personal income, which has a top rate of 31%, and a 15% flat tax on corporations, down from 29%.

A planned May 2003 visit on my part to Beijing to discuss the flat tax with officials in the Ministry of Finance was postponed due to the SARS outbreak. A Chinese translation of The Flat Tax has been published by the China Financial & Economic Publishing House in May 2003. Chinese professors of public finance have written articles on the benefits of sharply reducing China’s top personal income tax rate of 45% to no more than 20%.

2008-11-28T08:22:00.001-08:00

The Flat Tax at Work in Russia: Year Two

February 18, 2003

By Alvin Rabushka

On January 1, 2001, a 13% flat-rate tax on personal income took effect in Russia. (On the general principles and beneficial economic effects of the flat tax, see The Flat Tax.) Russia’s 13% flat tax replaced a three-bracket system, which imposed a top rate of 30% on taxable income exceeding $5,000.

During its first year, the 13% flat tax exceeded all expectations. In 2001, personal income taxes increased 46% in nominal rubles, or 28% in real rubles after adjusting for ruble inflation of 18%. Personal income tax as a share of consolidated budget tax revenue rose from 12.1% in 2000 to 12.7% in 2001. Since economic growth of 5.0% in 2001 was lower than the record 9.0% growth in 2000, the rise in revenue cannot be attributed solely, or even largely, to growth in 2001. For a detailed treatment of Russia’s 13% flat tax, see “The Flat Tax at Work in Russia.”

Data for 2002 are now available, posted to the Russian government’s Ministry of Finance web site. (Http://www.nalog.ru) Personal income taxes in 2002 amounted to R357.1 billion ($1=R31.7), up from R255.5 billion in 2001, an increase of 39.8%. Annualized average ruble inflation in 2002 was 15.8%. Thus, real ruble tax revenues rose 20.7%, another large increase. Moreover, economic growth of 4.3% in 2002 was lower than the 5.0% growth the previous year. Real ruble revenues continued to rise in 2002 despite slowing growth, suggesting greater compliance and efficiency in tax administration.

Since the implementation of Russia’s flat tax, personal income taxes have contributed a growing share of Russia’s consolidated budget. In 2002, the flat tax generated 15.3% of total tax revenue, up from 12.7% in 2001. From relative unimportance as a source of revenue a few short years ago, the 13% flat tax on personal income now exceeds excise taxes and taxes on natural resource use, and is fast catching up with corporate income tax and value added tax.

To date, the governments of Estonia, Latvia, and Russia have enacted flat-rate taxes on personal income. Russia has also implemented a reduction in the corporate rate of tax, from 35% to 24%, effective January 1, 2002. Russia has also enacted a flat-rate small business tax, the lesser of 6% of gross turnover or 15% of profits. (See “Further Extending Russia’s Tax Reforms,” “Tax Reform Remains High on Russia’s Policy Agenda,” and “Completing Small Business Tax Reform”) A Chinese edition of The Flat Tax is scheduled for publication by China’s Ministry of Finance in early 2003.

(Anjela and Diana Kniazeva, graduate students in the Department of Economics, Stern School of Business, New York University, provided research assistance for the preparation of this article.)

2008-11-28T08:19:00.000-08:00

Completing Small Business Tax Reform

July 3, 2002

By Alvin Rabushka

On July 2, 2002, the Duma, the lower house of the Russian Parliament, concluded its business prior to the start of its summer vacation. Among the bills approved was a comprehensive reform of small business taxation. Once the measure is approved by the Federation Council, the upper house of Parliament, and signed by President Putin, the measure becomes law.

On May 22, 2002, I posted to this site an article entitled “Tax Reform Remains High on Russia’s Policy Agenda.” It described the government’s proposal. Small firms with fewer than 20 staff and turnover under R15 million ($477,100 at current exchange rates) could choose to remit the lesser of a 15% flat tax on profits or a 6% flat tax on turnover. Eligible businesses would enjoy exemption from value-added tax, sales tax, property tax, and social insurance taxes.

The measure approved by the Duma on July 2 retained the previous provisions on tax rates and turnover, but extended the number of employees in any eligible small business to 100. The benefits of qualifying as a small business are readily apparent since larger corporations are subject to a 24% profits tax.

We have commented on this site on all of Russia’s major tax reforms, especially the 13% flat tax on personal income (see “The Flat Tax at Work in Russia” and The Flat Tax). The personal income tax has been especially productive of revenue, with ruble receipts up 28% in real terms in 2001 compared with 2000.

On July 1, 2001, the senior deputy minister of finance reported that underpaid taxes to the federal budget in the first half of 2002 amounted to R 17 billion ($540.17 million). He acknowledged that collection of tax on the extraction of natural resources, income tax for individuals, and the unified social tax was satisfactory, but that the collection of value-added taxes and profits taxes was below projections. (See www.rbcnews.com/free/20020701140045.shtm) The reasons for the new small business tax are to improve incentives and compliance among these firms. With exemptions from value-added tax, sales tax, property tax, and social insurance taxes, small businesses will receive a substantial reduction in their tax burdens. Banking, insurance, and investment businesses are excluded from the small business tax reform.

Where can Russian tax reform go from here?

Additional simplification can be achieved by reducing the small business profits flat tax rate to 13%, which would eliminate the unnecessary distinction between sole proprietors and small businesses.

A more drastic measure would reduce the corporate income tax rate from 24% to 13%, thereby permitting full integration with the personal and small business taxes. This would enable all taxpaying entities to be treated equally in terms of the choice of legal ownership.

If it were necessary to maintain revenue neutrality, the government could raise the value-added tax by a few percentage points, or impose a higher natural resource extraction tax.

Recent rate reductions and simplifications have transformed a complex, high-rate tax system into a simpler, low-rate system. A few additional measures could complete the process of tax reform.

2008-11-28T08:17:00.000-08:00

Tax Reform Remains High on Russia’s Policy Agenda

May 22, 2002

By Alvin Rabushka

On April, 2002, I posted to this site an article entitled “Further Extending Russia’s Tax Reforms.” It described the Russian government’s new proposal to radically simplify and reduce the tax treatment of small businesses. Under the plan, small business firms could choose to remit the lesser of a 20% flat tax on profits or an 8% flat tax on revenues. Firms that qualify—those with no more than 20 staff and turnover under R10 million ($320,000)—would also be exempt from value-added tax, sales tax, property tax, and social insurance taxes.

Thus far, Russia’s 13% flat tax on personal income (see “The Flat Tax at Work in Russia”), which took effect in 2001, has met its two major objectives of improving incentives and compliance. Building on it, the Russian government reduced corporate income tax rates from 35% to 24% in 2002. On May 21, 2002, the government further enhanced its small business proposal.

It widened the definition of a small business to include firms with turnover up to R15 million ($469,000), a 50% increase over the initial proposal of a few months ago. Small business firms could choose to remit the lesser of a 15% flat tax on profits or a 6% flat tax on turnover.

Note that the 15% flat tax on small business profits is close to the 13% flat tax on personal income, which encompasses sole proprietors. By reducing the 20% rate to 15%, the Russian government will make it easier in the future to equalize the tax treatment of small business income, eliminating the distinction between sole proprietor and small firms of 2-20 employees.

2008-11-28T08:15:00.001-08:00

Further Extending Russia’s Tax Reforms

April 1, 2002

By Alvin Rabushka

The Russian government is in the process of further extending its tax reforms. A first step was the introduction of a 13% flat tax on personal income (see “The Flat Tax at Work in Russia” and “Improving Russia’s 13% Flat Tax”), which took effect in 2001. Second, it reduced the corporate tax rate from 35% to 24%, beginning January 1, 2002.

Now the Russian government is planning to simplify and reduce the tax burden on small businesses. Under the current proposal put forth by the Russian government, a small business is defined as having no more than 20 staff and annual turnover under R10 million (about $322,000 at the current exchange rate). The proposal would grant small businesses a choice between a 20% flat tax on profits or an 8% flat tax on revenues, whichever is lower, beginning January 1, 2003 (assuming Duma approval, which appears likely). This small business tax rate on profits partially splits the difference between the higher 24% corporate rate and the 13% personal rate.

Other changes in the tax treatment of small businesses will accompany the reduction in rates. Collection of the small business tax will shift from a monthly to quarterly basis, mirroring the reporting of estimated taxes for private entrepreneurs and professionals in the personal income tax. Accounting for tax purposes will change from an accrual to cash basis; taxes will no longer be collected on imputed or phantom income. Finally, small businesses will be able to expense their outlays on capital assets in place of the current depreciation system (along the lines of the Section 179 expensing provision in the U.S. Internal Revenue Code). These changes are expected to reduce accounting costs for small business enterprises.

The plan also exempts small businesses from value-added tax, sales tax, property tax, and social insurance taxes.

Assuming some version of this small business tax reform proposal is enacted by the Duma this year, Russia will have completed a major overhaul of its personal, corporate, and small business taxation within the short span of three years. Some opportunity for further simplifying the personal income tax remains (see “Improving Russia’s 13% Flat Tax”), especially reducing the 30% tax rate on dividends now that the corporate profits tax rate has been cut to 24% and there is no capital gains tax on the sale of Russian equities.

2008-11-28T08:11:00.000-08:00

Improving Russia’s 13% Flat Tax

March 11, 2002

By Alvin Rabushka

On February 21, 2002, I posted to this site an article entitled “The Flat Tax at Work in Russia.” In that article, I pointed out an anomaly in Russia’s 13% flat tax, namely, there are two sources of income that are taxed at higher rates. The first source is dividends and the income of non-residents, which are taxed at 30%. The second consists of five different kinds of income, which are taxed at 35%. These are (1) gains and prizes from contests and games for the purpose of advertising, (2) winnings of lotteries and pari-mutual bets, (3) net insurance receipts, (4) bank taxable interest, and (5) gains from loans at below-market rates. As mentioned in “The Flat Tax at Work in Russia,” for all practical purposes, the latter three kinds of income are either lightly taxed or not taxed at all.

There is, in my view, no apparent reason for these two higher rates, especially the 35% rate, which serve only to complicate the simplicity and administration of Russia’s otherwise transparent 13% flat tax.

In apparent agreement with this view, the Russian government is currently preparing a Bill on Lotteries that would reduce the 35% tax rate on lotteries to the standard flat rate of 13%. (See http://www.rbcnews.com/free/20020307152617.shtml) The organizer of a lottery would have to pay 10% of the profit derived from the lottery after deducting all expenses and awarding prizes. The bill will define lotteries aimed at the promotion of specific goods on the market as a kind of lottery and taxed at 13%.

It will be worth watching the Russian government in the coming months to see if it continues to simplify its flat tax on personal income by dropping the remaining kinds of income taxed at the third rate. The reduction in the corporate tax rate from 35% to 24%, which took effect on January 1, 2002, should also prompt the government to reduce that 30% tax rate on dividends in the near future.

2008-11-28T08:08:00.000-08:00

The Flat Tax at Work in Russia

February 21, 2002

By Alvin Rabushka

On March 25, 1981, I first proposed the idea of a flat tax on the editorial page of The Wall Street Journal in an article entitled “The Attractions of a Flat-Rate Tax System.” Later that year, on December 10, 1981, Robert E. Hall and I set forth the mechanics of a specific flat tax proposal in an article entitled “A Proposal to Simplify Our Tax System.” Twenty years later, the flat tax has become a reality in, of all places, the Russian Federation.

Since the emergence of the Russian Federation a decade ago, taxpayer compliance has been a problem. To help resolve this problem and improve incentives, the Russian government enacted in July 2000 a 13% flat-rate tax on personal income. It took effect on January 1, 2001, replacing the previous three-bracket system, which imposed a top rate of 30% on taxable income exceeding $5,000. President George W. Bush praised Russia’s flat tax in each of his meetings with President Vladimir Putin, most recently during their November 15, 2001, press conference held at Crawford High School.

A year has passed since its implementation, which provides an opportunity to evaluate its success.

From a revenue standpoint, the 13% flat tax has exceeded all expectations. Preliminary data for 2001 reveal that the flat tax generated R254.7 billion, an increase of R80.2 billion over 2000, up 46%. ($1 = R30.8) Adjusting for ruble inflation of about 18% during 2001, real ruble revenues increased about 28%. Personal income tax, which contributed 12.1% to consolidated budget revenues in 2000, amounted to 12.7% in 2001. Since economic growth in 2001 of 5.2% was lower than the record 8.3% growth in 2000, the substantial rise in personal income tax revenue cannot be attributed solely, or even largely, to last year’s growth, but rather to the tax reform itself.

It is estimated that 60 million Russian employees receive salaries or wages subject to personal income tax. In tax year 2000 (the deadline for filing was May 3, 2001), only 2.8 million individuals filed tax returns. This small number is due to the fact that, for most employees, income tax is calculated and withheld monthly by employers and remitted directly to the Russian Treasury. Individuals need not file a return unless they owe additional taxes from other sources of income or seek a refund because of special deductions or credits.

Sole proprietors can choose to pay imputed income tax instead of filing a tax return. In tax year 2000, some 1.336 million individuals chose this option, which also reduces the number of returns.

Before examining the tax form itself, it should be noted that the new tax includes two higher brackets. Dividends are taxed at 30%. However, double taxation on corporate income has been abolished. Since the corporate tax rate fell from 35% in 2001 to 24% on January 1, 2002, it is likely that the tax on dividends will be lowered in the future. In addition to dividends, foreigners and Russians who reside in Russia less than 183 days during the tax year are taxed at a rate of 30% on their taxable income. Other sources of income (e.g, lotteries) are taxed at 35%. The higher rates on dividends and other sources of income reflect a Russian distinction between so-called “unearned income” and “earned income” (even though capital gains on homes and securities are exempt).

Russia’s basic flat tax form, Form 3, resembles U.S. Form 1040A, with one addition. Form 3 is used to report income from wages and salaries (Form 1040A), along with professional income (Schedule C). For most taxpayers, required information can be reported on Form 3. Individuals with self-employment and other sources of income, and/or who are able to itemize specific deductions, may need to attach several supplementary schedules. Altogether, taxpayers can attach up to 10 supplementary schedules (A, B, V, G, D, E, Zh, Z, I, and K—the Russian alphabetical order transliterated according to the Library of Congress convention). For a small number of taxpayers, the Russian individual tax return is more complicated to file, closer to Form 1040. Some Russians will likely avail themselves of the Russian version of H & R Block. The tax form recognizes this complexity by including space for the signature of a professional tax preparer.

Form 3 is only two pages long. The first page includes the taxpayer’s name, taxpayer identification number, details of a photo ID, period of residence and citizenship (for foreign nationals), permanent address, and number of supplementary documents. Page 2 of form three on which financial data are reported consists of 5 sections. Sections I through IV contain 13 lines on which salaried employees and small business owners, or sole proprietors, report their income from all sources, expenses, allowable deductions, tax credits, and other pertinent items. Section V contains 4 lines that apply to self-employed professional persons for reporting estimated income on a quarterly basis (Form 1040-ES).

Here is the information that the taxpayer must report line by line.

Section I. Tax base (income) which is taxable at a 13% rate.

1. Wages, salaries, and small business income (gross income)

2. Total deductions (transferred and added from lines V3.2, G1.5, G2.6, D1.1, D2.1, E.4, Z3.6, and Z3.7 as described below)

V3.2: Total expenses related to individual entrepreneurship and private practice (small business expenses as reported on Schedule C)

G1.5: A deduction of up to R2000 for each the following types of partially taxable income (cash allowances from employer to retired employees due to age or disability, gifts that are exempt from the gift and inheritance tax, prizes in cash or kind won in contests sponsored by the government or a legislative body, and employer reimbursement of prescribed pharmaceuticals—total limit of R8000 from all four categories)

G2.6: Deductions from the sale of real property and financial assets. Deduction for housing and land owned less than five years is limited to documented costs up to R1 million; deduction for housing and land owned more than five years is unlimited. For non-financial real property owned less than three years, deduction is limited to R125,000; for non-financial real property owned more than three years, deduction is unlimited. For gains on the sale of financial assets, deduction is unlimited (capital gains reported on Schedule G)

D1.1: Expenses incurred in the production of income received from honoraria, publications, patents, and copyrights (reported on Schedule E)

D2.1: Expenses incurred in the production of income from contractual services under civil-law contracts (reported on Schedule C relating to Form 1099 Misc.)

E.4: Calculation of standard deduction (equivalent to personal exemptions). For example, R3000 per month for victims of nuclear disasters and disabled servicemen; R500 per month for other victims of war and radiation sickness; R400 per month for all other taxpayers until annual income exceeds R20,000; and R300 per month for each child under 18 years of age until the child’s parent or guardian’s income exceeds R20,000 in any tax year. Calculation of social deductions (equivalent to itemized deductions): for charitable contributions (limited to 25% of total revenue); self-financed education (limited to R25,000); children’s education (limited to R25,000 per child); medical and drug expenses (limited to R25,000);and catastrophic medical expenses (unlimited). Social deductions are granted only after the return is filed.

Z3.6: Expenses supported by documents for purchase and/or new construction of residential housing in 2001 (limited to R600,000) This excludes summer homes, or dachas.

Z3.7: Mortgage interest deduction on residential housing in 2001 (unlimited) Excludes summer homes, or dachas.

3. Calculation of tax due to be remitted from consolidated annual income (total taxable income), line 1 minus line 2.

4. Tax due: line 3 times 13%

II. Tax base which is taxable at a 30% rate

5. Total dividends (Schedule B); income of non-residents in Russia (less than 183 days)

6. Offsets (tax withheld by payer of dividends and remitted on behalf of recipient)

7. (Line 5 times 30%) minus line 6.

III. Tax base, which is taxable at a 35% rate.

8. Other income. Sources include: (1) gains and prizes from contests and games for the purpose of advertising, (2) winning of lotteries and pari-mutual bets, (3) net insurance receipts (4) bank taxable interest; and, (5) gains from loans at below-market rates.

Bank interest is taxable (1) when interest on ruble deposits exceeds 75% of the Central Bank’s refinancing rate, or (2) on foreign currency deposits if annual interest exceeds 9%. Material gains from borrowing are taxable if interest charged is below 75% of the Central Bank’s refinancing rate or below 9% if in foreign currency.

These adjustments amount to a proxy for inflation. The current Central Bank refinancing rate is 25%. Three-quarters of that is 18.75%. Most deposits earn less than 18.75%, which means that interest income is not generally subject to taxation.

9. Tax due (line 8 times 35%).

IV. Calculation of total amount of tax due from all sources of income

10. Sum of lines 4, 7, and 9 (total tax due)

11. Withheld taxes and estimated tax payments (total taxes paid)

12. Refund due

13. Additional tax due

V. Calculation of estimated income and estimated tax for private entrepreneurs, public notaries, and those in private practice.

14. Total estimated income (determined by taxpayer)

15. Total withholding, according to Articles 2.18 and 2.21 of the tax code

16. Total estimated taxable income

17. Total advance income tax payments

Lines 15, 16, and 17 are filled in by the tax authorities.

Russia’s personal income tax excludes income from a large number of sources. Examples include public welfare for the disabled and children, state pensions, alimony, grants received for development of science, education and art, compensation for natural disasters, enterprise-provided medical services, stipends to students, proceeds of part-time farming (food grown at dachas), income from amateur hunting, athletic prizes, interest on government debt, capital gains on government bonds, military pay, recipients of payments from labor-union sponsored athletic and cultural events, and others.

To summarize, the 13% flat tax has exceeded the expectations of the government in terms of revenue. For the vast majority of taxpayers, its implementation is simple and no forms need be filed. For small businesses, the 13% flat tax provides strong incentives and compliance is straightforward. Small wonder that President Bush had a gleam in his eye when he praised Russia’s flat tax. Perhaps he might take a lesson from President Putin as he considers his campaign themes for 2004.

(Anjela and Diana Kniazeva, graduate students at Stanford University, provided research assistance for the preparation of this article.)