Bing Crosby Sings Out For The Flat Tax

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Iceland Abandons the Flat Tax

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

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

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

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

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

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

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

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

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

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

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).