One Global Flat Tax?

[Deborah]

A flat tax has received support from a variety of political sides.
Jerry Brown nearly won the Democratic nomination for president in 1992
with a flat-tax agenda. Steve Forbes campaigned on the flat tax in his
1996 presidential bid. And now, President Bush may be considering a
flat tax. On his trip to Slovakia last month, President Bush praised
Prime Minister Dzurinda for the flat tax system he introduced last
year. So, what are the arguments for and against a flat tax?

What is a flat tax? It's typically a single tax rate applying to all
income tax, and it can similarly apply to corporate and sales taxes.
Currently, progressive tax rates are higher for those on higher
incomes, but there are many ways to avoid tax, e.g. by deducting losses
or expenses. A flat tax would apply without such deductions. Estimates
are that if all deducations were abolished and all loopholes were
closed, the federal tax rate could come down to 18% and still generate
the same amount of revenues. To further reduce bureaucracy and to
protect the poor from paying an effectively higher tax rate, a treshold
would apply, i.e. the first $10,000 or $15,000 of their income would
not be taxed at all.

Opponents argue that a flat tax would reduce equity. They reject claims
that lower rates would result in more overall revenue. They argue that
it would hurt income currently spent on research and other activities
that can currently be deducted from tax. They argue that there would be
less funding for social services, making life harder for the poor who
currently pay little on no tax in the first place, unless a generous
tax-free treshold was applied - for those on low incomes, a flat tax
rate would be higher than the rate they currently pay. Wherever the
treshold is, a flat tax would create a steep burden for those who
currently depend on odd jobs and are just under that treshold - they
would have little incentive to work more, even though they needed the
extra money most.

Flat-tax advocates argue that it is simple and reduces red tape and the
bureaucratic burden for everyone, resulting in more productive
activities than seeking to avoid taxes by means of creative accounting.
A low rate encourages tax compliance and reduces the black economy,
resulting in higher total tax revenues and thus more money available
for social services. Currently, efforts to launder black money nurture
organized crime. Lower tax rates decrease the black economy and thus
decrease organized crime. Furthermore, a low flat rate encourages
investment and attracts foreign investments, resulting in more
employment opportunities and overall economic growth and prosperity for
all, including for the poor.

Whatever argument may appeal most, the flat tax turns out to be
increasingly popular. Hong Kong has long had a 15 percent flat tax and
has enjoyed perhaps the highest growth rate of any nation on the globe
over the past 40 years. The success of Hong Kong has led the mainland
to move toward Hong Kong's system, through tax-rate reductions and
incentives to save and invest.

Flat taxes used to be the norm in Western countries. Karl Marx
advocated a "heavy progressive tax" and the idea seemed unstoppable
ever since, or rather, until recently. Ironically, most flat-tax
countries have a Communist history. Indeed, most of the noise has come
from developments in Eastern Europe. Countries that once were the
strongholds of the Communist doctrine now seem the strongest supporters
of a flat tax.

Estonia was the first European country to introduce a flat tax, back in
1994, at a rate of 26%. Latvia and Lithuania followed. Russia
introduced a flat tax of 13% on personal income in 2001. Serbia
followed with 14% and so did Ukraine with 13% and Georgia with 12%. In
Slovakia, a flat tax of 19% was introduced in 2003 for all personal,
corporate and sales taxes, which became the more significant when
Slovakia joined the EU in 2004. Romania, which is to join the EU in
2007, has just introduced a flat tax of 16% and the centre-right
opposition parties in Poland and the Czech Republic are both pushing
for flat taxes of 15%.

Not surprisingly, opponents of flat tax in Germany and France are
calling for harmonization of taxes accross the EU. But the future may
be inevitable - as the old adage says: if you cannot beat them, join
them! So, will the inevitable result of harmonization efforts be a flat
tax with the same rate applying across the globe?

Further reading:
http://www.clubforgrowth.org/n­ews/040913.php
http://www.csmonitor.com/2005/­0308/p01s03-woeu.html
http://www.humaneventsonline.c­om/article.php?id=6709
http://groups-beta.google.com/group/capitalism