Flat tax finds supporters in former communist countries

Hoover Institution political scientist Alvin Rabushka points to eight different countries in the former Soviet bloc that have adopted some form of flat tax in recent years. In addition to Russia and Slovakia, they are Romania, Georgia, Estonia, Latvia, Serbia and Ukraine. He predicts that Poland and the Czech Republic will soon joint them.

Why so much interest in the flat tax? A key reason is that it is far more effective at raising revenue than progressive rates, says Bruce Bartlett, a senior fellow with the National Centre for Policy Analysis:

With progressive rates, it looks as if extra revenue is being extracted from the wealthy.

But it is also giving them a powerful incentive to arrange their affairs so as to minimise their tax liability and also to evade taxes altogether.

With a flat tax, there is much less incentive to engage in tax avoidance or tax evasion.

Also, the knowledge that everyone is being treated equally helps eliminate the culture of evasion that often becomes pervasive in high-tax countries, driving even the law-abiding into the underground economy, says Bartlett.

The flat tax is not a cure-all for tax evasion, but as the Russian example shows, it can help a lot. When people perceive that the tax system is fundamentally unfair, because everyone appears to be paying different tax rates despite having similar incomes, it diminishes any guilt taxpayers may feel about underpaying their taxes.

Too often in Washington, tax fairness is defined solely in terms of what economists call vertical equity – whether the rich pay more than the poor. But a single tax rate promotes horizontal equity – people are more confident that their neighbours are paying the same tax they are, which boosts compliance, says Bartlett.

Source: Bruce Bartlett, Flat Tax Finds Supporters in Former Communist Countries, National Centre for Policy Analysis, March 2, 2005.

For text: http://www.ncpa.org/edo/bb/2005/20050302bb.htm

For more on Flat Tax: http://www.ncpa.org/iss/tax/

FMF Policy Bulletin/ 08 March 2005