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).

Flat Tax Update, October 2009

After a relatively quiet year, the flat tax is showing new life.

Prime Minister Najib Razak of Malaysia introduced his government’s 2010 budget on October 27, 2009. The budget contained modest reductions in public expenditure and taxation, but also included a special provision to promote selected important industries for Malaysia’s economic development. Both foreign and Malaysian employees will be taxed at a flat rate of 15 percent if they work in the fields of green technology, biotechnology, educational and healthcare services, financial advisory and consultancy, logistics, and tourism. The idea is to provide a more attractive workplace for these activities in Malaysia than Singapore, which taxes personal income up to a higher 20 percent rate.

In November, Zimbabwe’s finance minister will announce his country’s new budget for 2010. The Zimbabwe Telegraph reported that his budget is likely to include a flat tax regime.

International aid agencies have been pressuring the Baltic countries to abandon their flat taxes as the price of financial assistance to assist them through the global financial crisis. Latvia and Lithuania have been the two principal targets of these efforts. Thus far, both have successfully resisted abandoning their flat taxes in exchange for financial aid. They have agreed to cut spending and adopt other austerity measures, but not to replace the flat tax with graduated tax rates.

The Saskatchewan office of the Frontier Center for Public Policy (with offices also in Manitoba and Alberta) released Policy Studies No. 68 in September 2009 by David Seymour entitled "Five Single Rate Tax Thoughts." This study is likely to influence tax policy after the next Saskatchewan provincial election

Interest in the flat tax has begun to appear in the media in Moldova, Uganda, and Aruba.