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.