A taxing solution
A quiet revolution has been sweeping through the countries of the old Soviet bloc. It is the flat tax revolution, the idea that complex tax structures can be replaced with a single tax rate applied to income, spending or corporate profits. Estonia led the way a decade ago with a flat tax rate of 26% (soon to be cut to 20%). Slovakia has the same 19% tax rate on incomes, profits and consumer spending. Now Georgia, Latvia, Lithuania, Poland, Romania, Serbia and Ukraine have all adopted elements of the flat tax.
Notably so has Russia. It has a flat tax of 13% on personal income and 35% on profits. Thus an idea usually associated with free-market think tanks in America is blossoming at the heart of what used to be the Soviet empire.
Until now the reaction in the West has been one of curiosity. Such simple arrangements are fine for countries building tax systems from scratch, the argument goes, but not for sophisticated economies. That, however, is changing. The Greek government, led by Kostas Karamanlis, is actively considering a 25% flat rate of income tax to replace existing rates of 15%, 30% and 40%.
In Germany tax rates have been coming down. Angela Merkel, leader of the Christian Democratic Union, front-runner to emerge as the largest party in next month’s federal elections, has appointed Paul Kirchhof, a leading advocate of the flat tax, to her campaign. Two years ago he recommended a 25% flat rate of tax on personal income and company profits, something that would give Germany a huge advantage.
The arguments in favour of a flat tax are straightforward and compelling. By setting a single tax rate and abolishing complex reliefs, allowances and credits, the tax system becomes simple to administer and easy to understand. Accountants might suffer, but the rest of us would gain. If the flat tax is set at a low enough rate, the rich lose the incentive to engage in expensive tax planning schemes. Those on low incomes can be protected with a generous tax threshold.
Could it work here? The Treasury has been examining the arguments. In a paper released under Freedom of Information rules it appeared to have little to say in favour. But detective work by George Osborne, the shadow chancellor, has uncovered sections of the paper that it refused to publish. They show that Gordon Brown’s department finds flat taxes are simpler, more efficient and likely to “stimulate the economy and lead to increased employment”. They are also progressive; the rich pay proportionately more.
Old hands at the Treasury can also recall useful precedents. Nigel Lawson’s corporate tax reforms of the 1980s moved in a flat tax direction by setting a single tax rate for companies and abolishing most reliefs. The result was a surge in corporate tax revenues. The Thatcher cuts in the higher rates of income tax led to an increase in tax revenues from the better off and a rise in the proportion of income tax paid by them. This was exactly what Professor Arthur Laffer, inventor of the Laffer curve, would have predicted: if you cut taxes you can increase tax revenues and create a virtuous circle.
Mr Brown, of course, is a lost cause when it comes to the flat tax. He has, if anything, gone the other way, introducing more complexity into the tax system, including the labyrinthine nightmare of his tax credits. Critics such as the left-leaning Institute for Public Policy Research argue that a flat tax is just a Trojan horse for cutting taxes. Nothing wrong with that, though, if it increases the government’s revenues by encouraging enterprise and reducing avoidance. We report today that the think tank Reform says that the “Ipod” generation is insecure, debt-ridden and, above all, over-taxed. Young people are having the dynamism and enterprise knocked out of them. For an economy to thrive, that clearly has to change and a flat tax might just be the answer.
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Yeah 13% income tax is nice, but they also charge 35% social security tax from enterprise, and clearly enterprises ain't going to legalise much higher black salaries paid in envelopes.
A quiet revolution has been sweeping through the countries of the old Soviet bloc. It is the flat tax revolution, the idea that complex tax structures can be replaced with a single tax rate applied to income, spending or corporate profits. Estonia led the way a decade ago with a flat tax rate of 26% (soon to be cut to 20%). Slovakia has the same 19% tax rate on incomes, profits and consumer spending. Now Georgia, Latvia, Lithuania, Poland, Romania, Serbia and Ukraine have all adopted elements of the flat tax.
Notably so has Russia. It has a flat tax of 13% on personal income and 35% on profits. Thus an idea usually associated with free-market think tanks in America is blossoming at the heart of what used to be the Soviet empire.
Until now the reaction in the West has been one of curiosity. Such simple arrangements are fine for countries building tax systems from scratch, the argument goes, but not for sophisticated economies. That, however, is changing. The Greek government, led by Kostas Karamanlis, is actively considering a 25% flat rate of income tax to replace existing rates of 15%, 30% and 40%.
In Germany tax rates have been coming down. Angela Merkel, leader of the Christian Democratic Union, front-runner to emerge as the largest party in next month’s federal elections, has appointed Paul Kirchhof, a leading advocate of the flat tax, to her campaign. Two years ago he recommended a 25% flat rate of tax on personal income and company profits, something that would give Germany a huge advantage.
The arguments in favour of a flat tax are straightforward and compelling. By setting a single tax rate and abolishing complex reliefs, allowances and credits, the tax system becomes simple to administer and easy to understand. Accountants might suffer, but the rest of us would gain. If the flat tax is set at a low enough rate, the rich lose the incentive to engage in expensive tax planning schemes. Those on low incomes can be protected with a generous tax threshold.
Could it work here? The Treasury has been examining the arguments. In a paper released under Freedom of Information rules it appeared to have little to say in favour. But detective work by George Osborne, the shadow chancellor, has uncovered sections of the paper that it refused to publish. They show that Gordon Brown’s department finds flat taxes are simpler, more efficient and likely to “stimulate the economy and lead to increased employment”. They are also progressive; the rich pay proportionately more.
Old hands at the Treasury can also recall useful precedents. Nigel Lawson’s corporate tax reforms of the 1980s moved in a flat tax direction by setting a single tax rate for companies and abolishing most reliefs. The result was a surge in corporate tax revenues. The Thatcher cuts in the higher rates of income tax led to an increase in tax revenues from the better off and a rise in the proportion of income tax paid by them. This was exactly what Professor Arthur Laffer, inventor of the Laffer curve, would have predicted: if you cut taxes you can increase tax revenues and create a virtuous circle.
Mr Brown, of course, is a lost cause when it comes to the flat tax. He has, if anything, gone the other way, introducing more complexity into the tax system, including the labyrinthine nightmare of his tax credits. Critics such as the left-leaning Institute for Public Policy Research argue that a flat tax is just a Trojan horse for cutting taxes. Nothing wrong with that, though, if it increases the government’s revenues by encouraging enterprise and reducing avoidance. We report today that the think tank Reform says that the “Ipod” generation is insecure, debt-ridden and, above all, over-taxed. Young people are having the dynamism and enterprise knocked out of them. For an economy to thrive, that clearly has to change and a flat tax might just be the answer.
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Yeah 13% income tax is nice, but they also charge 35% social security tax from enterprise, and clearly enterprises ain't going to legalise much higher black salaries paid in envelopes.
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