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.