Jewish World Review Feb. 28, 2005 / 19 Adar I 5765
John H. Fund
High Taxes Wither Away: Former communist countries lead the way in abandoning progressivity
President Bush went out of his way last week in Europe to praise the growing number of countries that have junked their complicated tax codes and adopted a flat tax.
Mr. Bush speaks for a growing number of Americans who are embracing the ideaamong them Clint Eastwood, whose said few years back that the adoption of a flat tax would mean "a little old lady on a home computer [could do] the work of all these thousands of bureaucrats and accountants. Passing that would be amazing, wouldn't it?"
The bipartisan tax-reform commission Mr. Bush has appointed will no doubt look carefully at the global spread of the flat tax, a concept its supporters hail because it is simple to calculate, is harder to cheat on, encourages investment and fosters growth economic growth. Little wonder it's catching on in Eastern Europe.
In 1994, newly independent Estonia borrowed the idea of the flat tax from highly prosperous Hong Kong, which 45 years before had introduced a dual income tax system, allowing taxpayers to pay a flat rate on their gross income. (In practice, almost everyone in Hong Kong pays the flat tax.) Lithuania and Latvia quickly followed Estonia's lead. Today, all three Baltic states are booming, and, along with Slovakia, a recent convert to the flat tax, they are the least-taxed countries in the European Union.
The success of the Baltics attracted the attention of Andrei Illarionov, Russian president Vladimir Putin's economic adviser. At his suggestion, Mr. Putin implemented a 13% flat tax for individuals, along with a 15% rate for most business income. The results have been astonishing as Russia's black-marketers decided the tax was low enough and transparent enough that it wasn't worth evading.
After struggling for a decade, Russia's economy grew 5% a year after inflation in 2002 and 2003 and 7.3% last year. The flat tax has been a key reason that revenue from the country's personal income tax has grown by 150% since 2001. "This constant expansion of the government tax revenue is the result of less tax evasion and increased incentive to work, save, and invest," noted the Adam Smith Institute in London in a report on the flat tax's success.
Russia's experience set off a wave of imitators. In 2003, Serbia introduced a 14% tax on income and corporate profits along with plans to cut it further. Russia's neighbor, Ukraine then set a 13% rate, with dividends and bank interest taxed at only 5%.
Last year Slovakia junked an old tax system that included 66 exemptions, 19 sources of untaxed income and 27 items with their own specific tax rates. Instead it put in place a 19% flat tax on income and profits. In December Jan Oravec, president of Slovakia's Hayek Foundation, told me that the country's flat tax has helped sustain an economic growth rate of 4.9%, lowered unemployment and led to a surge in surge in tax revenues as people take advantage of the new opportunities to work and invest. Last year, the World Bank named Slovakia the world's top economic reformer in 2004 for improving its investment climate.
It was in Slovakia last week that Mr. Bush privately told Mr. Putin how much he admired Russia's success in implementing the flat tax. Later, in public comments, he praised his Slovakian hosts for their flat tax, which "has helped to attract capital and create economic vitality and growth."
Alvin Rabushka, a senior fellow at Stanford's Hoover Institution who consults with countries all over the world on how to design a flat tax, can barely keep up with all the new adherents. Within two weeks after taking office in December, Romania's new prime minister, Calin Popescu Tariceanu, issued an emergency edict to take effect only three days later: Companies and individuals now pay a single flat rate of 16%. Georgia also adopted the flat tax as of Jan 1.
Europe is becoming so crowded with flat-tax nations that the original proponents of the idea are having to play catch-up. Estonia has just cut its rate to 24%, and has promised to slash it to 20% over the next two years. Mr. Rabushka's book "The Flat Tax" has just been published in Chinese, with a preface by Lou Jiwei, the vice minister of finance. If China were to climb on board the flat-tax train, more than a quarter of the world's population would be filling out their taxes on the back of a postcard.
In the U.S., interest in the flat tax languished after Steve Forbes, who championed a 17% flat rate during his 1996 presidential campaign, failed to win the GOP nomination. Former House majority leader Dick Armey, a pioneer in promoting the flat tax, privately admits that Congress is unlikely to abolish tax deductions for mortgage interest and charitable contributions, but there is lots of room for President Bush's tax reform commission to propose a dramatic flattening of the income tax code.
Liberal Americans often deride the flat tax on the ground that its lower rates would starve public services and allow the rich to escape the higher taxes. But as former California governor Jerry Brown pointed out during his 1992 presidential campaign, the rich will always be able to hire experts to lobby for tax loopholes and avoid the higher rate traps set for them. "It is in everyone's interest to make sure everyone pays and that both tax loopholes and the underground economy are reduced," he told me at the time, citing studies that nearly 10% of the U.S. economy could be off of the books.
Indeed, under existing flat-tax systems the wealthy end up paying a larger share of total tax revenues. In flat-tax countries, taxpayers in the highest brackets more from consumption or tax-sheltered investments to more productive, taxable investments. Many higher earners work harder or take additional risks, rewarded by higher after-tax returns.
Despite all of its advantages, the flat tax faces enormous ideological opposition. Envy and the lust for the political control that complicated tax regimes can provide are powerful motivations to keep progressive tax systems in place. Karl Marx in "The Communist Manifesto" was among the first to call for "a heavy progressive or graduated income tax" at a time when a flat rate was the norm in advanced countries. He listed it as second in the list of priorities for a new society based on the class struggle.
It is therefore ironic that every country that has adopted the flat tax is a former communist nationexcept Hong Kong, the modern originator of the concept, which has seen its new communist rulers retain the flat tax as a centerpiece of its economic policies.
Given all this, why should the U.S. allow itself to continue to see its economic potential limited by a Marxist concept that most nations that followed that path are now fleeing from?
Every weekday JewishWorldReview.com publishes what many in Washington and in the media consider "must reading." Sign up for the daily JWR update. It's free. Just click here.
JWR contributor John H. Fund is author, most recently, of "Stealing Elections: How Voter Fraud Threatens Our Democracy". (Click HERE to purchase. Sales help fund JWR.)
Comment on this column by clicking here.
01/31/05 Rush for the Border: Limbaugh issues a warning to President Bush
01/24/05 If Bush wants to reform Social Security, he'll have to soften his approach to Congress 01/24/05
01/17/05 TiVo la France? Jacques Chirac wants to enter the news biz. The world won't be watching
01/10/05 A stolen election in Washington state? Not if bloggers can help it
01/03/05 The Unsung Maverick
12/27/04 All the Votes Fit to Count: Ukraine gets to revote. Why can't Washington state?
11/22/04 It's time to bring some intellectual diversity to America's colleges and universities
10/26/04 Turnout Titans: Meet the gurus of getting out the vote.
10/18/04: We May HAVA Problem: Will provisional ballots be the new chads?
10/12/04: Getting Physical: Union thugs target Republicans
10/04/04: The Producer: Meet Mary Mapes, the crusading journalist behind CBS's current troubles
09/23/04: Ballots or Briefs? In election 2004, the man with the most lawyers may win
09/13/04: I'd Rather Be Blogging: CBS stonewalls as "guys in pajamas" uncover a fraud
08/30/04: Tryout Time: The 2008 presidential campaign gets under way in New York.
08/23/04: Why we're refighting Vietnam: Blame McCain-Feingold
08/18/04: Silence of the Lamb: C-SPAN cancels 'Booknotes'
08/16/04: Louisiana North: Why New Jersey is a pit of corruption
08/02/04: Patriotic liberalism
07/28/04: Caught in the Web: How Democrats mobilized online and other campaign tales
06/28/04: Bad ACTors: If Dems want honest elections, why did a Soros-backed group hire criminals to get out the vote?
06/21/04: This Time, Get It Right: Instead of "lawyering up," both parties should be working to prevent another Florida
06/14/04: Don't Pardon Their French: "Good government" Californians embrace the system that produced David Duke
06/07/04: Freedom's Team: How Reagan, Thatcher and John Paul II won the Cold War
05/25/04: Don't Touch That Dial?
Radio hosts worry about the FCC's indecency regulations. What about political speech?
05/18/04: Anger Management: Dems start to realize that a campaign of hate won't beat President Bush
05/11/04: Will Sen. Kennedy turn out to be a political liability for John Kerry?
05/04/04: Buyer's Remorse: Dems start to worry that Kerry can't win
04/27/04: Arlen Specter's personality helps make him vulnerable in today's primary
04/20/04: Arnold Schwarzenegger thinks making laws should be a part-time job. He's right
03/23/04: Bragging of foreign support doesn't win many votes in America
03/16/04: The Vanishing Center: In both political parties, the defense of moderation is no virtue
03/09/04: A JFK-NBC Ticket? If Kerry wants to make things interesting, he'll consider Tom Brokaw for veep
03/02/04: As Virginia mulls a tax hike, all Americans should guard their wallets
02/24/04: Marriage of Inconvenience: Why same-sex nuptials make Democrats nervous
02/10/04: Republican Rot: Is Congress's GOP majority becoming as corrupt as the Democrats were?
02/03/04: Moore Trouble: Alabama's former chief justice may challenge Bush for the Religious Right vote
01/13/04: Rage of a Relic: Paul O'Neill is angry that the world has passed him by
01/06/04: Unintended Consequence: How Terry McAuliffe and James Carville created Howard Dean
09/03/03: The Anti-Dean: Why Hillary opposes the Democratic front-runner
06/27/03: The California jurist who may replace Justice O'Connor
06/02/03: Clinton the Hoover: Bill, Hillary and the Dems' political vacuum
05/27/03: Nerd Nirvana: Students are to the right of the faculty even at the U of Chicago
05/16/03: GOPers gain in the land of Humphrey and Mondale
04/28/03: With the war won, it's time for Bush to master the Senate
04/04/03: Is "diversity" on campus even a goal worth pursuing?
03/05/03: Sunday morning with the BBC
02/28/03: Shut Up, They Explained: If you can censor this, thank a teacher
02/21/03: Unmitigated Gaul:
Saddam isn't the only dictator with
whom Jacques Chirac is cozy
02/18/03: Growing number of black officials breaking ranks by calling for a more honest approach to race relations
01/31/03: Half and Half: Republicans have achieved parity among American voters
11/11/02: Sobering Thoughts: The GOP's cup runneth over? No, it's half empty
10/31/02: Blue Gray: California's governor answers a Nobel Prize winner with obscenities
10/14/02: Bad Hair Day: Did Montana Dems exploit antigay prejudice?
10/11/02: The kill-everything senate
09/30/02: Schroeder did what it took to win--but at what cost to Germany?
08/22/02: Buh-Bye Bob, So Long Cynthia : No amount of shouting could've saved Barr or McKinney
07/29/02: GOP: Get Over Panic --- Dems are vulnerable on corporate scandals, too
07/17/02: Not Just an Average Joe: A black GOPer may give Rep. Eliot Engel a run for his money
07/15/02: The McCain Mutiny-II
07/01/02: Opening the Schoolhouse Door: The politicians can't stop school choice now
06/20/02: The Body' Bows Out --- American politics will be duller without Jesse Ventura
06/06/02: It's time for President Bush to stand up to California's senators
05/16/02: A Court Intrigue: Procedural funny business in a racial-preference case
05/14/02: Thin moral ice: New revelations from a skater's Stasi files recall an oppressive era
05/09/02: Newark, Zimbabwe!?
05/02/02: Will Terror Leave Us No Choice? Teachers unions try to use Sept. 11 as an excuse for bad schools
04/23/02: The New Nixon? Al Gore plots his comeback
04/16/02: 'I, Uh, I Have No Comment': A union plays dirty in opposing an antitax initiative
03/31/02: Don't Just Do Something, Stand There!: Filibusters can help the Senate GOP get things done
03/14/02: Red-Light District: It's time to draw the line on gerrymandering
02/21/02: Slippery Slope: Can Dick Riordan beat California's Democratic governor?
02/14/02: Reform School: The Shays-Meehan incumbency protection act
02/07/02: Arizona Highway Robbery: Politicians make a grab for campaign cash
01/31/02: Disfranchise Lassie: Even dogs can register to vote. We need election reform with teeth
01/17/02: Dr. King's Greedy Relations: Cashing in on a national hero's legacy
01/10/02: Oil of Vitriol
01/04/02: The little engine that couldn't--and the senators who don't want it to
12/24/01: E-mail and low-cost computers could be conduits for a learning revolution
12/13/01: How Gore could have really won
12/07/01: Let our students keep their cell phones
12/04/01: Why the White House gave the RNC chairman the boot
11/12/01: A Winsome Politician: She won an election in a majority-black district--and she's a Republican
11/01/01: Bush Avoids Politics at His Peril
10/30/01: Cocked Pit: Armed pilots would mean polite skies
10/24/01: Chicken Pox: Hardly anyone has anthrax, but almost everyone has anthrax anxiety
10/11/01: Will Rush Hear Again? New technology may make it possible
10/04/01: Three Kinds of pols
08/24/01: Lauch Out: Who'll replace Jesse Helms?
08/08/01: Tome Alone: Clinton's book will probably end up on the remainder table
08/03/01: Of grubbing and grabbing: Corporation$ and local government$ perfect "public use"
07/31/01: Affairs of State: The Condit case isn't just about adultery. It's about public trust and national security
07/14/01: The First Amendment survives, and everyone has someone to blame for the failure of campaign reform
07/12/01: He's Still Bread: Despite what you've heard, Gary Condit isn't toast --- yet
07/12/01: Passing Lane: Left-wing attacks help boost John Stossel's and Brit Hume's audiences
06/25/01: Man vs. Machine: New Jersey's GOP establishment is doing everything it can to stop Bret Schundler
06/15/01: A Schundler Surprise? Don't count out "the Jack Kemp of New Jersey"
06/06/01: Memo to conservatives: Ignore McCain and maybe he'll go away
05/29/01: Integrity in Politics? Hardly. Jim Jeffords is no Wayne Morse
05/22/01: Davis' answer to California's energy crisis? Hire a couple of Clinton-Gore hatchet men
05/07/01: Prematurely declaring a winner wasn't the networks' worst sin in Florida
04/23/01: How to fix the electoral process --- REALLY!
04/11/01: A conservative hero may mount a California comeback
03/30/01: Can the GOP capture the nation's most closely balanced district?
03/06/01: Leave well enough alone
02/22/01: Forgetting our heroes
02/15/01: In 1978 Clinton got a close look at the dangers of selling forgiveness
02/12/01: Clinton owes the country an explanation --- and an appology
02/06/01: How Ronald Reagan changed America
01/16/01: Why block Ashcroft? To demoralize the GOP's most loyal voters
01/15/01: Remembering John Schmitz, a cheerful extremist
12/29/00: Why are all Dems libs pickin' on me?
Dubya's 48% mandate is different than Ford's
12/13/00: Gore would have lost any recount that passed constitutional muster
11/13/00: The People Have Spoken: Will Gore listen?
10/25/00: She's really a Dodger
09/28/00: Locking up domestic oil?
09/25/00: Hillary gives new meaning to a "woman with a past"
09/21/00: Ignore the Polls. The Campaign Isn't Over Yet
©2001, John H. Fund