Why Are Flat Taxes Spreading Globally?

October 12, 2005

The most striking trend in tax policy in recent years has been the rapid rise of flat tax systems in country after country (see previous posts here, here, here and here).

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.

Tax Analysts’ Martin A. Sullivan has an excellent analysis of the recent trend toward flat taxes in the October 10, 2005 Tax Notes (via TaxProf Blog). An excerpt:

Governments — especially those in developing economies with massive compliance problems — are going to lower rates and broaden their tax bases no matter how many books Americans write on tax reform. It is just icing on the cake for those governments, hungry for foreign investment, that they can call their modified systems “flat taxes.” Not only is it free advertising but it’s also advertising targeted to the investor class.

What better way for former communist countries to signal their capitalist renaissance than by appearing to embrace the fiscal ideas of U.S. conservatives? What better way for the American flat tax movement to claim continuing success than to go beyond textbook presentations and point to tangible progress in other countries? But to force that square peg into a round hole, the “receiving” governments and the “donating” conservatives have let the definition of the flat tax slip. That hasn’t caused much fuss because it is to the mutual advantage of both parties.

It is to our advantage, however, to look beyond the slogans and see the flat tax “revolution” for what it really is. The world is becoming more global. Capital and even labor are more mobile. Out of necessity, governments around the world are responding with lower rates and broader tax bases. That is the good side of tax competition. International forces are bursting the political coalitions that have kept high-rate, loophole-ridden tax systems viable.

What is called the flat tax revolution is only a small part of a worldwide transformation in taxation. The flat tax is a neat idea, but it has political limitations. It certainly is not the driving force behind tax reforms around the world. It is just along for the ride.

Read the full piece here.

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