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.