Germany contemplating a flat tax

Germany's massive tax code may soon get a face-lift. The opposition Christian Democratic Union recently proposed scrapping the loopholes in the income-tax system and in return, it wants to cut taxes to three simple rates: 12, 24 and 36 percent. (The top bracket now stands at 45 percent.) The Free Democrats, traditionally Germany's most liberal party, submitted a similar bill to Parliament.

One factor driving reform, says the Wall Street Journal, is competition.

Germans increasingly realise that factories, jobs and capital aren't going to stay in Germany when Russia and Ukraine have a 13 percent flat tax on income.

Flat (or semi-flat) tax fever hasn't reached Germany yet, but it's spreading in Europe: Slovak Republic (19 percent), Estonia (26 percent), Lithuania (33 percent), and Latvia (25 percent).

Bulgaria, Romania and Georgia are all considering flat taxes.
Another motivator, notes the Journal, is Germany's unhappy experience with tax gimmicks intended to stir investments into enterprises the state has deemed "worthy" – as evidenced by the vast tracts of empty commercial space and housing in the eastern states:

After unification in the late 1980s, the government tried to stimulate construction in the poorer east by offering tax breaks for building projects.

Scrapping the loopholes would encourage taxpayers to focus on business opportunities that promise the highest return on capital instead of investing in projects that offer more tax protection.
The lesson around the world is that high rates breed tax loopholes that in turn benefit mainly the wealthy who can afford to hire the lawyers to exploit them. If flat tax reform can happen in Germany, it can happen anywhere, says the Journal.

Source: Editorial, The Taxman Goeth, Wall Street Journal, January 19, 2004.

For text (WSJ subscription required)
http://online.wsj.com/article/0,,SB107447166150804807,00.html

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

FMF Policy Bulletin/ 20 January 2004