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The Global Trend Toward Flat-Rate Taxes

2 min readBy: Andrew Chamberlain

Just last week at a panel here in Washington, I was shocked to hear a respected scholar assert that the only place in the world where the idea of a single-rate income taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. was taken seriously was here in the supposedly radical, free-market United States.

Anyone who’s been paying attention to world events in tax policy over the last decade would find that notion absurd. Once considered a sacred cow of tax policy, progressive-rate income taxes are being abandoned in favor of improved economic performance in country after country in recent years.

Since 1994, Estonia, Georgia, Latvia, Lithuania, Romania, Russia, Serbia, Slovakia and Ukraine have all adopted single-rate income taxes ranging from 12 percent to 19 percent. Poland is set to replace its progressive system with a flat rate of 18 percent, and Greece and Italy are both considering single-rate taxes in the range of 25-30 percent.

According to the National Post, Canada may be next in line to join the flat-tax club, possibly putting pressure on U.S. lawmakers to follow suit or risk being left in the dust economically:

With the idea sweeping the newly emerging democracies of central and eastern Europe, and even creeping into the groaning welfare states of Western Europe, the question must be asked: Is it time for Canada to adopt a flat taxAn income tax is referred to as a “flat tax” when all taxable income is subject to the same tax rate, regardless of income level or assets. on income?

The concept is simple enough. Multiple marginal rates of taxation are collapsed into a single, low rate. Few deductions are permitted and most regulations, exemptions, exclusions, deductions and credits are eliminated, along with the stacks of convoluted tax codes that go with them.

In most jurisdictions that have adopted flat taxes, economic activity has increased and government revenues have risen. The lower rates spur greater investment, and also encourage greater compliance with tax laws, which means government’s tax take increases from both a rise in national production and a fall in cheating…

Here in Canada, Alberta adopted a 10% single-rate tax on personal income in 2001. And for those who charge that a one-rate tax is “regressive,” hitting low-income workers disproportionately hard, Alberta’s results provide ample evidence to the contrary: So long as generous basic personal exemptions are maintained, low-income filers are generally the biggest winners…

[T]he more Canadians know about how well [a flat tax] is working in Alberta and elsewhere, the more they will be inclined to push for one. [Full piece here.]

Although politicians are always behind the intellectual learning curve, there’s increasing consensus among economists that single-rate taxes gain an economic system far more in enhanced efficiency than they sacrifice in supposed tax equity. Hopefully the experience of eastern Europe in the coming years will help show that to lawmakers in a concrete way.