Tax Trends in Other Countries: The Flat-Tax Fever
For many years, I have lobbied for implementing a flat tax, not only in California, but also for the entire U.S. Hong Kong adopted a flat tax ages ago and has performed like gangbusters ever since. Seeing a flat-tax fever seemingly infect Europe in recent years is truly exciting. In 1994, Estonia became the first European country to adopt a flat tax, and its 26 percent flat tax dramatically energized what had been a faltering economy. Before adopting the flat tax, Estonia had an impoverished economy that was literally shrinking--making the gains following the flat tax implementation even more impressive. In the eight years after 1994, Estonia sustained real economic growth averaging 5.2 percent per year.
Latvia followed Estonia's lead one year later with a 25 percent flat tax. In the five years before adopting the flat tax, Latvia's real GDP had shrunk by more than 50 percent. In the five years after adopting the flat tax, Latvia's real GDP has grown at an average annual rate of 3.8 percent (See Figure 8). Lithuania has followed with a 33 percent flat tax and has experienced similar positive results.
Russia has become one of the latest Eastern Bloc countries to institute a flat tax. Since the advent of the 13 percent flat personal tax (on January 1, 2001) and the 24 percent corporate tax (on January 1, 2002), the Russian economy has had amazing results. Tax revenue in Russia has increased dramatically (See Figure 9). The new Russian system is simple, fair, and much more rational and effective than what they previously used. An individual whose income is from wages only does not have to file an annual return. The employer deducts the tax from the employee's paycheck and transfers it to the Tax Authority every month.
Due largely to Russia's and other Eastern European countries' successes with flat tax reform, Ukraine and the Slovak Republic implemented their own 13 percent and 19 percent flat taxes, respectively, on January 1, 2004.
Arthur B. Laffer is the founder and chairman of Laffer Associates, an economic research and consulting firm. This paper was written and originally published by Laffer Associates. The author thanks Bruce Bartlett, whose paper "The Impact of Federal Tax Cuts on Growth" provided inspiration.
For the full article:
http://www.heritage.org/Research/Taxes/bg1765.cfm