Fortieth Anniversary Of The Flat Tax Movement

March 25, 2021, is the fortieth anniversary of the beginning of the flat tax movement. I include an op-ed that was published on March 25, 1981, in the Wall Street Journal. I wrote it four months after Ronald Reagan’s Tax Policy Task Force submitted its report upon his election. My motivation for the op-ed was that while the Task Force’s recommendations, which were largely adopted, improved the then current federal income tax code, they did not go nearly far enough to simplify and fix other flaws in the tax code.

My WSJ article can be read on my website: alvinrabushka.com.  Click on the toolbar button for Articles and Essays.  It is the first entry under the heading Wall Street Journal.

After its publication, Bob Hall and I collaborated during summer 1981 to write a flat tax plan. On December 10, 1981, we published it in the Wall Street Journal. (Second entry under WSJ heading on my website.). That article presented the Hall-Rabushka “flax tax on a postcard.”

Hall-Rabushka is a fully-integrated, progressive, single-rate consumption tax. Progressivity occurs in the wages and salaries component by way of personal allowances.

The Flat Tax At Work In Central And Eastern Europe, 1994-2011

Brian Wheaton, Harvard Ph.D. Candidate in Economics, has written a superb paper documenting that the adoption of a flat tax increased economic growth in 20 Central and Eastern European countries during 1994-2011.  A must read.

An abstract of the paper can be read here.

The full paper can be read here.

Three Antarctic Jurisdictions With A Flat Tax

Jurisdiction                                                              Tax Rate (%)

British Antarctic Territory                                               7%

South Georgia And The South Sandwich Islands                7

French Southern And Antarctic Lands.                             9

Countries And Jurisdictions With A Flat Tax On July 2, 2020

Jurisdiction                         Tax Rate (%)

Abhkazia                                   10%

Andorra                                     10

Artsakh                                      21

Belarus                                      12

Belize                                        25

Bolivia                                       12

Bosnia & Herzegovinia                10

Bulgaria                                     10

Estonia                                       21

Georgia                                      20

Greenland                                  42

Guernsey                                    20

Hungary                                     15

Jersey                                        20

Kazakhstan                                 10

Kyrgyzstan                                  10  

Madagascar                                 10

Mongolia                                     10

North Macedonia                         10

Pridnestrovie                              10

Romania                                     10

Seychelles                                  15

South Ossetia                              12

Timor-Leste                                10

Turkmenistan                              10

Ukraine                                       18

Yemen                                        15

At the peak of the flat tax movement, 44 countries and jurisdictions had a flat tax.  The number  has declined to 27, with Russia the most recent to add a second top rate.  Politicians in both dictatorships and democracies find that imposing a second top rate on a small percentage of high-income earners is popular, especially when twinned with increased social benefits for lower- and middle-class taxpayers.  The same holds for a second lower rate.

Of the 27 jurisdictions listed above, 10 have populations under 100,000; 3 between 100,000-1 million; 3 between 1-10 million; 6 between 10-20 million; and 3 over 20 million (Ukraine is the largest at 42 million).

Four are disputed territories of other countries lacking international recognition (Abkhazia, Artsakh, Pridnestrovie [aka Transnistria], South Ossetia).  Two are British Overseas Territories (Jersey, Guernsey).  One is a Danish Autonomous Dependent Territory (Greenland).  Yemen has two claimants to the government, Houthis and forces loyal to Hadi based in Aden.

The Flat Tax In Retreat: Russia Adds A Second Top Rate Of 15% On Its Personal Income Tax.

In 2001 Russia implemented a 13% flat tax on personal income.  Russia was the first large country to adopt a flat tax,

In a speech to the nation on June 23, 2020, Russian President Vladimir Putin announced that the government would impose a second rate of 15% on persons earning more than 5 million rubles ($72,675) a year, effective January 1, 2021.  

The higher 15% rate is projected to raise an additional 60 billion rubles ($872 million), which will be used to offset some of the government's spending on the economic costs of the coronavirus.

To stimulate the growth of Information Technology companies, the new tax law would reduce the social security contributions on technology firms for its employees from 14% to 7.6% and cut the profits tax on IT firms from 20% to 3%.

Hoisted From The Archives, June 17, 2010: The Origins Of The Flat Tax

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.’”  (He restated this history at a Hoover Event on October 2, 2019.)

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 In Retreat

The flat tax movement peaked at 40 countries.  Beginning in 2009, the following countries added a second (or more) higher rate(s) on upper-income households, with two adding a second lower rate.

Tuvalu, 2009:   added second lower rate of 15% to previous 30% flat rate

Iceland, 2010:  replaced 36% flat rate with progressive rate schedule up to 46.28%

Ukraine, 2011:  added second higher rate of 17% to previous 13% flat rate

Czech Republic, 2013:  added second higher rate of 22% to previous 15% flat rate

Slovakia, 2013:  added second higher rate of 25% to previous 19% flat rate

Montenegro, 2013:  added second higher rate of 15% to previous 9% rate

Albania, 2014:  replaced 10% flat rate with two rates of 13% and 23%

Grenada, 2014:  added second lower rate of 15% to previous 30% flat rate

St. Helena, 2015:  replaced 25% flat rate with two rates of 26% and 31%

Jamaica, 2016:  added second higher rate of 30% to previous 25% flat rate

Guyana, 2017:  replaced 30% flat rate with two rates of 28% and 40%

Mauritius, 2017:  replaced flat rate of 15% with two rates of 10% and 20%

Trinidad and Tobago, 2017:  added second higher rate of 30% to previous 25% flat rate

Latvia, 2018:  Replaced its 23% flat rate with three rates of 20%, 23%, and 31.4%

North Macedonia, 2019:  added second higher rate of 18% to previous 10% flat rate

The second higher rates in the Czech Republic and Slovakia are temporary 7-year measures.  They may be extended, made permanent, or allowed to lapse.

All of these measures were enacted after the financial crisis of 2008-09, some to raise additional revenue, others promoted by newly-elected leftist political parties.

Updates will be posted if and when other countries add a second or more rates to their flat tax, or if new countries adopt a flat tax.