Flat tax takes hold in “new Europe”

When Donald Rumsfeld made his famous crack about "New Europe" versus Old, he was speaking about foreign policy. But it turns out the spirit of the new is also sweeping economic policy: Flat tax fever is spreading across Eastern Europe.

Russia instituted a 13 percent flat rate on income in 2001, and its success is now breeding imitators:

In May, Ukraine reformed its tax code along Russian lines with a 13 percent top marginal rate.

The Slovak Republic's ruling coalition has just agreed to implement a 19 percent flat tax beginning next year.

Poland's Prime Minister Leszek Miller has expressed a strong interest, and the opposition Civil Democratic Party in the Czech Republic is also supporting it.

The impetus here seems to be the power of the positive flat tax example, in the Baltic states and especially in Russia.

Estonia (26 percent rate) and Latvia (25 percent) enacted their own flat taxes during the 1990s, albeit not as boldly as Russia.

In 2002, those economies grew an average of 6.1 percent, among the highest rates in Europe, old or new and their budget deficits are also well under control, which certainly can't be said about old "progressive" tax-rate Europe.

The theory of the flat tax is that a low rate across a broad tax base will improve both tax compliance and efficiency. And that's exactly what's happening in Russia, where tax avoidance used to be a national pastime.

Source: Editorial, Flat Tax Fever, Wall Street Journal, July 11, 2003.

For text http://online.wsj.com/article/0,,SB105788085847059000,00.html

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

FMF Policy Bulletin\15 July 2003 & 26 January 20210