Friday, November 28, 2008

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.

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