Friday, November 28, 2008

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.

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