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.