Flat Tax

2009-10-27T12:53:00.000-07:00

Flat Tax Update, October 2009

After a relatively quiet year, the flat tax is showing new life.

Prime Minister Najib Razak of Malaysia introduced his government’s 2010 budget on October 27, 2009. The budget contained modest reductions in public expenditure and taxation, but also included a special provision to promote selected important industries for Malaysia’s economic development. Both foreign and Malaysian employees will be taxed at a flat rate of 15 percent if they work in the fields of green technology, biotechnology, educational and healthcare services, financial advisory and consultancy, logistics, and tourism. The idea is to provide a more attractive workplace for these activities in Malaysia than Singapore, which taxes personal income up to a higher 20 percent rate.

In November, Zimbabwe’s finance minister will announce his country’s new budget for 2010. The Zimbabwe Telegraph reported that his budget is likely to include a flat tax regime.

International aid agencies have been pressuring the Baltic countries to abandon their flat taxes as the price of financial assistance to assist them through the global financial crisis. Latvia and Lithuania have been the two principal targets of these efforts. Thus far, both have successfully resisted abandoning their flat taxes in exchange for financial aid. They have agreed to cut spending and adopt other austerity measures, but not to replace the flat tax with graduated tax rates.

The Saskatchewan office of the Frontier Center for Public Policy (with offices also in Manitoba and Alberta) released Policy Studies No. 68 in September 2009 by David Seymour entitled "Five Single Rate Tax Thoughts." This study is likely to influence tax policy after the next Saskatchewan provincial election

Interest in the flat tax has begun to appear in the media in Moldova, Uganda, and Aruba.

2009-08-14T09:07:00.000-07:00

Britain Experiments With a Flat Tax

Desperate for revenue to plug gaping deficits in their public finances, the Western democracies are waging an all-out assault on tax havens around the world. On August 12, 2009, Liechtenstein capitulated to British demands that its private banks will no longer hold secret British accounts that enable Britons to evade British taxes. It is estimated that there are 5,000 British accounts holding about $5 billion in secret accounts. Between 2010 and 2015, British investors holding funds in these accounts will be given preferential terms of a 10 percent penalty on evaded tax, plus repayment of evaded tax, if they voluntarily declare their tax arrears to Her Majesty’s Revenue and Customs.

Those who come forth voluntarily will also be given the option of paying a 40 percent flat tax on all outstanding tax claims. Although an ostensibly high rate, the 40 percent flat tax replaces all other British taxes due including national insurance, inheritance, income, and value added taxes.

Those who do not comply will be required to move their funds out of Liechtenstein by 2015 and their names will not be provided to British tax authorities. However, if caught, the penalty will be 100 percent, and it is most likely that all such individuals, companies, trusts, and other structures will remain under Her Majesty’s Revenue and Customs microscope for years to come.

It seems logical that Britain will work out a similar arrangement with Switzerland and other tax havens around the world. One might hope that this flat tax experiment will be so successful that Parliament will give serious thought to replacing all its taxes with a simple, but lower than 40 percent, flat tax.

Other Flat Tax News

From October 1, 2009, Romania will no longer tax reinvested profits. This change will make the country’s 10 percent flat tax on corporate and personal income even more attractive to investors.

In summer 2009, Rwanda tendered for a consultancy firm to conduct a study into the adoption of a flat tax. Uganda is watching the results of this exercise.

Following the landslide election victory of Ricardo Martinelli as president of Panama in June 2009, the new minister of economy and finance announced in early July the government’s plan to implement tax reforms as Martinelli promised during the campaign. One phase is the application of a flat tax.

Latvia and Lithuania have thus far resisted pressure from the International Monetary fund and internal political groups to replace their flat taxes graduated rates.

In May 2009, Moldova’s acting president Vladimir Voronin proposed that the government should examine the introduction of a 15 percent flat tax on individuals to raise the competitiveness of Moldova’s economy to that of neighboring flat-tax countries.

In Canada, Alberta is the only province with a flat-rate provincial income tax, assessed at 11 percent. Its success has prompted neighboring Saskatchewan to consider a 10 percent flat tax to stop leakage of economic activity to Alberta. The maritime province of New Brunswick is also considering a flat tax.

In September the Swiss Canton Thurgau will hold a referendum on the flat tax. If it passes, which appears likely, Thurgau will increase the number of flat-tax cantons to three.

2009-02-20T12:05:00.000-08:00

Flat Tax Progress in January-February 2009

Panama

2009 is getting off to an auspicious start. Ricardo Martinelli, the head of Panama’s leading opposition party plans to implement a flat tax if he is elected president in the upcoming May 3, 2009, election. His party has stated it wants to cut the top 27% tax rate on individuals to a flat rate of 15%, or perhaps an even lower 10%. In exchange for broadening the tax base by eliminating incentives for specific sectors, the current statutory 30% corporate tax rate could also be cut to 15% or 10%.

In January 2009 Martinelli joined forces with Juan Carlos Varela and the Panameñista Party; Varela is running as Martinelli’s vice-presidential candidate. Balbina Herrera, their opponent in the ruling Revolutionary Democrat Party, opposes the flat tax on the grounds that it would eliminate the country’s multiple-rate progressive system. Polling data in February 2009 show Martinelli with 53% support, up from 44.3% in January.

United Kingdom

In late January 2009, Conservative Party leader David Cameron spoke about his vision for the United Kingdom at Demos (a Blairite think tank). If the Conservatives win the next national election that must be held by 2010, Cameron will become prime minister. During the question and answer period, he stated that flat rates of tax are more progressive than graduated rates, basing his belief on the experience of those Central and Eastern European countries which adopted the flat tax in the past 15 years. Apart from their gains in revenue and improved economic conditions which accompanied the switch to the flat tax, its enactment in Britain would also eliminate all the hassles to businesses and individuals due to excessively complicated tax laws.

Oklahoma

On February 17, 2009, by a 9-6 vote, Oklahoma’s Senate Finance Committee passed a flat tax bill that would set the rate at 3.423% for all income brackets. If enacted, it would replace the current graduated rate system that taxes income over $10,000 at 7%. In exchange for the lower flat rate, the bill would broaden the tax base by reducing several deductions.

2009-02-12T10:26:00.000-08:00

A Bold Fresh Flat Tax Proposal for New Zealand

On February 10, 2009, former finance minister and current finance spokesman for the ACT political party in New Zealand, Sir Roger Douglas, introduced a bold fresh flat tax plan. Sir Roger is a former Labor Party member known for his free-market, low-tax “Rogernomics” policies during the 1980s. Speaking to the Rotary Club of Orewa, he termed his plan a means to achieve a low-tax welfare state by redesigning the tax system in concert with the social welfare system.

Seven political parties occupy 122 seats in New Zealand’s Parliament. ACT holds 5. Along with 5 from the Maori Party, ACT has a confidence arrangement with the current government-led National Party of 58 seats, giving the latter a coalition majority of 68 seats.

Under Sir Roger’s plan, individuals would have the choice to continue to pay taxes and receive benefits in accordance with New Zealand’s current tax system and monopoly-run health, welfare, and retirement services. Or, they could opt in to a new system that works as follows.

An individual’s first NZ$30,000 would be tax free. Above that tax-free threshold, individuals would pay a flat-rate tax, to be reduced over the next 15 years along with the corporate tax, to 15%. The tax-free threshold would be increased to keep pace with inflation, and the threshold would rise with the number of children. Those earning below the threshold would receive a tax credit (cash) to boost their income up to the threshold.

The current personal income tax consists of five rates, 13.9% on the first NZ$14,000 of taxable income, 22.4% between NZ$14,000-40,000, 34.4% between NZ$40,000-70,000, 40.4% above NZ$70,000, and 46.4% for those who fail to complete a declaration form. These rates include a charge of 1.4%, an earners’ levy rate, to cover non-work related injuries. Self-employed individuals are subject to the same rate as employees. Companies pay a standard 30% profits tax. The goods and services tax, a value-added tax, would continue at 12.5%, along with excises on alcoholic beverages, tobacco products, and fuel.

In return for being taxed at a low flat rate, individuals will be required to contribute to a dedicated retirement plan in their own names. For health care, individuals and families will be required to purchase catastrophic health insurance, and risk coverage against injury, sickness, or job loss. The purposes of the plan are to improve incentives to work, save, and invest, while reducing dependence on the government for social services.

2009-01-21T10:46:00.000-08:00

The Flat Tax at Work in Albania: Year One

Beginning January 1, 2008, Albania implemented a 10% flat tax on corporate and personal income. The 10% personal rate replaced five rates that peaked at 30% while the 10% corporate rate was halved from the previous 20% rate. Despite the reduction in rates, total revenues increased from LEK 125 billion in 2007 to LEK 148 billion in 2008, an increase of 18.4%. ($1.00 = LEK 96.71). With inflation a modest 3% in 2008, real inflated-adjusted revenue rose 15.2%.

One other development in the flat tax world is worth noting. On January 1, 2009, Latvia’s personal income tax rate fell from 25% to 23%.

2008-12-29T08:46:00.000-08:00

2008 Flat Tax Wrap-Up

A flat tax on individuals (households) and, in some instances, the same flat-rate on individuals and corporations, has spread throughout most of Central and Eastern Europe. The remaining holdouts in alphabetical order, along with their tax-rate schedules, are as follows:

Croatia: 15, 25, 35, 45%
Hungary: 18, 36, 40%
Kosovo: 5, 10, 20%
Moldova: 7, 10, 22%
Poland: 19, 30, 40%
Republika Srpska (Serb-ruled portion of Bosnia and Herzegovina): 10, 15%
Slovenia: 16, 27, 41%

Croatia and Slovenia have steadfastly resisted any movement to a flat tax. Croatia has stuck to a tax-incentive approach for particular investments in specified locations. Slovenia regards itself as a member country of Western Europe, which requires that it maintain a schedule of steeply-graduated rates.

Serious movement towards a flat tax has yet to occur in Hungary and Moldova.

In Poland the governing coalition under the leadership of Prime Minister Donald Tusk favors a flat tax, but the leading opposition party holds the office of president with the power to veto legislation. If and when Tusk’s party wins control of both parliament and the presidency, Poland will be poised to adopt a 19% flat tax on individuals to complement its 19% corporate tax.

Kosovo is a brand-new Muslim country with a large concentration of Catholic Serbs in the upper 10% of the country bordering Serbia. Its immediate neighbor on its southwest border, Muslim Albania, adopted a flat tax in mid-2007. In this regard, the prospects for Kosovo following suit in the near future appear promising.

Republika Srpska has only to eliminate its 15% rate to attain parity with the 10% flat tax adopted in the Federation of Bosnia and Herzegovina in 2008.

Other Flat Tax Potpourri

The province of New Brunswick in Eastern Canada has been debating the merits of a flat tax for several months. A bi-party committee concluded its examination of the tax issue in mid-November 2008. The committee’s recommendation was for a provincial flat tax of 10% to rival that of Alberta. In addition, it was suggested that the corporate rate be cut from 13% to 5%. Any lost revenue is to be made up from a rise in the harmonized sales tax from 13% to 15%.

In late November, Dutch Minister of Finance Wouter Bos stated that he was not opposed to a flat tax of 37% that would replace the current four-bracket set of rates that peaks at 52%.

Expatriates in Korea can choose the lower of two personal income tax calculations. One imposes a 17% flat tax that excludes deductions and credits. The other treats 70% of gross income as taxable, exempting 30% from formal earned income and then allows for certain deductions and credits. Domestic Korean employees are subject to a four-bracket schedule with a top rate of 34% in 2009.

The Swiss Canton of Thurgau is poised to vote on a cantonal flat tax in September 2009. The odds are favorable that it will become the third Swiss Canton to replace graduated income taxes with a flat tax.

2008-12-15T09:26:00.000-08:00

Why the U.S. Federal Income tax is so Hard to Reform

Since President Reagan’s 1986 tax legislation, which broadened the tax base and lowered tax rates, every subsequent proposal to reform the federal income tax has come to naught. Indeed, the length and complexity of the code continue to grow topsy. Every group that benefits from a new provision becomes another political constituency for keeping and expanding it.

Several proposals for heath care reform, if enacted, would create another large interest group that will hamper future efforts at tax reform. Under current law, employer-provided health insurance to employees is not subject to individual taxation, whereas those who buy insurance on their own must pay for it out of after-tax income. One proposal suggests leveling the playing field by eliminating the exemption for employer-provided insurance, but its authors argue that eliminating that benefit would face enormous political opposition. Accordingly, they recommend that individual purchasers of insurance receive a tax deduction. On its face, this seems fair, and would likely extend coverage to some currently uninsured. The problem is that this new tax benefit, like so many before it, would further make the federal income tax impervious to comprehensive reform.

The same applies to special tax benefits for education, energy, green technology, housing, and so on. Why is that some, but not other, endeavors are to be encouraged and rewarded with tax benefits? Why not give the entire economy the benefit of lower rates?

The way to reform the tax code is to broaden the base and lower the rates (preferably to a low flat rate). Advocating new deductions and/or credits only makes it more difficult.

2008-12-11T11:39:00.000-08:00

The Flat Tax Spreads to the Federation of Bosnia and Herzegovina (FBiH) within Bosnia and Herzegovina (BiH)

By Alvin Rabushka

The Dayton Agreement of 1995 ended the war between Serbs, Muslims, and Croats in what was the former Yugoslav territory of Bosnia and Herzegovina (BiH). Two separate entities were initially established within BiH: the Federation of Bosnia and Herzegovina (FBih), also known as the Bosniak-Croat entity, and Republika Srpska (RS). A third entity was subsequently established, the Brčko District (BD), which is a small community of about 80,000 inhabitants, of whom 40% are Bosniaks (Muslims), 49% Bosnian Serbs, and 11% Bosnian Croats. (According to the Dayton Peace Accords, an arbitration process could only determine the disputed portion of the Inter-Entity Boundary Line.) Brčko continues to be a disputed, multi-ethnic town, subject to its own laws and those of FbiH.

Separate tax systems were established in each of the three entities. The BD assembly passed a new law on income tax in the middle of 2003, to take effect at the beginning of 2004. The law eliminated double taxation of interest and dividends, exempted capital gains, and imposed a uniform 10% flat tax on salaries, incomes, and profit of corporations. Each employee receives a personal allowance of BAM 240 and an additional BAM 120 for each dependent per month. ($1 = BAM 1.47 as of December 11, 2008. BAM stands for Convertible Marka.)

The FBiH encompasses 11 Cantons, including Sarajevo. In the second week of 2008, the FBiH House of Representatives adopted a new income tax to take effect on January 1, 2009. The House abandoned the initial idea of a two-rate system of 10% and 15% in favor of a flat rate of 10%. The new law replaces a cantonal based income tax that ranged between 5-30% depending on cantonal regulations and different types of income. A personal allowance exempts the first BAM 3,600 a year from income tax. Additional fractional allowances are permitted for a dependent spouse, dependent children, other dependent immediate family members, and for disability of immediate family members. Dividends, prizes, pensions, and child allowances are exempt.

The income tax in Serb-dominated RS imposes two rates: 10% between taxable income BAM 2,460-25,008 and 15% on taxable income above that.

2008-11-30T12:37:00.000-08:00

The Flat Tax Spreads to Belarus

November 30, 2008

By Alvin Rabushka

Effective January 1, 2009, Belarus will replace its five-bracket personal income tax (PIT) with a flat-rate tax of 12%. The current PIT imposes a marginal tax rate of 9% on annual aggregate taxable income up to BYR 3,402,000. Thereafter, the rates are 15% between BYR 3,402,001-8,505,000, 20% between BYR 8,505,001-11,907,000, 25% between BYR 11,9077,001-15,309,000, and 30% over BYR 15,309,001. ($1=BYR 2,142 as of November 28, 2008. The Belarus ruble has remained in a narrow trading range of $1=BYR 2,142-2,160 during 2004-8.) Taxpayers are allowed a basic deduction for themselves and their children up to the age of 18. Under existing law, dividends are taxed at 15% and royalties at 40% while interest and capital gains are tax-free. Further details of the new Belarus 12% flat tax will be posted here as they become available.

Belarus selected a flat rate of 12% to be 1% less than Russia’s 13% flat tax.

The corporate profits tax remains at 24% and value added tax at 18%, both harmonized with Russia, with whom Belarus has single-market arrangements.

2008-11-29T07:52:00.000-08:00

The Flat Tax Spreads to the Canton of Uri in Switzerland

November 6, 2008

By Alvin Rabushka

Switzerland has a three-tiered income tax system in which income taxes are levied at the federal, cantonal, and municipal level. On average, about a third of all personal income taxes is collected at each level, although there is wide variation among the twenty-six cantons and some 2,900 municipalities. The federal income tax consists of nine brackets that range from 0% on the first Swiss francs (CHF) 25,000 ($1 = CHF 1.175) to a top rate of 13.2%, after which it falls to 11.5% on income exceeding CHF 716,500.

On September 28, 2008, the Canton of Uri adopted a flat-rate personal income tax to commence January 1, 2009. The new law imposes a flat-rate of 7.2% for the canton, and 7.2% for each municipality in the canton. An additional 1% for churches brings the total to 15.4%. The law includes a personal deduction of CHF 14,500 along with a married deduction of CHF 11,000 and child deductions ranging from CHF 8,000 to CHF 20,000.

A married taxpayer with two children with a gross income of CHF 100,000 would be allowed to deduct, in addition to CHF 41,000 for spouse and children, another CHF 11,850 for old age and survivors insurance, and another CHF 7,300 for job-related expenditures and insurances. This leaves a taxable base of CHF 37,350 subject to the two flat rates for cantonal and municipal taxes. Including federal tax of CHF 106, total tax of CHF 5,484 represents less than 6% of gross income.

The tax rate on profits on domestic Swiss enterprises is a flat 4.7% at both the canton and municipal levels. To this is added 1% for churches, resulting in a flat-rate of 10.4%. A holding company which has no active business in Uri is exempt from cantonal and municipal taxes. There is a small municipal wealth tax of 0.001% that does not take effect until wealth reaches CHF 2 million.

Uri thus joins the Canton of Obwalden with a flat tax, Other cantons are actively exploring the flat tax as part of their plan to attract investment and high-income individuals.

2008-11-29T07:51:00.000-08:00

The Flat Tax at Work in Russia: Year Seven, 2007

August 28, 2008

By Alvin Rabushka

The Federal Treasury of the Russian Federation has compiled the data for total taxes and revenues for the consolidated federal and regional budgets for 2006. The data show that the 13% flat tax on personal income continues to achieve very positive results.

In 2007, the Treasury collected 1,266.6 billion rubles ($1=RUB24.6) in personal income tax receipts, a nominal increase of 36.1% over the 930.3 billion rubles in 2006. After adjusting for annualized consumer price inflation of 11.9% in 2007, real personal income tax revenue rose 17.8% in 2007. Total real ruble revenue has substantially more than tripled in the seven years since the 13% flat tax was implemented on January 1, 2001. It should be recalled that the top marginal rate in 2000 was 30% before the implementation of the 13% flat tax. The low flat rate has contributed to the decline in capital flight, improved taxpayer compliance, and increased revenue.

The 13% flat tax has become a stable feature of Russia’s tax system. With the rise in real incomes percolating through the economy, receipts continue to grow at a healthy clip.

2008-11-28T09:41:00.000-08:00

Trinidad and Tobago Joins the Flat Tax Bandwagon

April 20, 2008

By Alvin Rabushka

Effective January 1, 2006, Trinidad and Tobago joins the ranks of the flat-tax countries. It implemented a flat tax of 25%, replacing the previous two-bracket system of 25% and 30%. Other features included raising the personal allowance from TTD (Trinidad and Tobago dollars) 25,000 to TTD 60,000 ($1 = TTD 6.265). A previously preferential TTD 40,000 allowance for individuals 60 years and over was eliminated, along with deductions of up to $18,000 for mortgage interest and $10,000 for first-time homeowners. Short-term capital gains are taxed as ordinary income.

The corporation tax was reduced from 35% to 25%, except for petrochemical and gas refining companies, which are taxed at 35%, and oil and gas exploration companies, which are taxed at 55% (of which 5% represents unemployment insurance). As of 2006, the rates for wages, salaries, self-employment income, and non-energy corporation income are a uniform 25%.

In 2008, the deduction for contributions to approved pension fund/annuity plans was increased from TTD 12,000 to TTD 25,000. The tax rate on dividends was lowered from 15% to 10%, which reduced the double tax on corporate income by 4.25%. For corporations, the first-year write-off for the cost of investment in plant and machinery was raised from 60% to 75%.

2008-11-28T09:40:00.000-08:00

Kazakhstan Joins the Flat Tax Bandwagon

February 25, 2008

By Alvin Rabushka

On February 1, 2006, the president of Kyrgyzstan signed into law a change in the country’s tax code that substituted a 10% flat tax on individual income in place of a graduated structure of rates between 10-20%. At that time the president of neighboring Kazakhstan said that his country would consider implementing a flat tax in 2007.

Kazakhstan enacted substantial changes in the country’s tax code on July 7, 2006, and December 11, 2006. Effective January 1, 2007, a 10% flat rate on taxable individual income replaced the country’s previous six-rate system of 5, 10, 15, 20, 30, and 40% depending on income. The lowest 5% rate applied to the first 69,600 Tenge (KZT) of income with the top 40% rate on income exceeding 348,000 KZT. ($1 = 120.5 KZT) The 10% flat tax exempts from taxation a personal allowance linked to the minimum wage level.

Other changes reduced the interest withholding rate for individuals to 10% and the domestic individual dividend withholding rate to 5%. Self-employed individuals using simplified tax returns are charged a 3% flat rate. Capital gains on government bonds and the sales of securities listed on a stock exchange are tax-exempt.

2008-11-28T09:39:00.000-08:00

The Flat Tax is on the Agenda in Hungary

January 14, 2008

By Alvin Rabushka

Hungary is surrounded on several sides by flat tax countries: Slovakia in the north, Ukraine in the northeast, Romania in the east, and Serbia in the south. Near flat-tax neighbors include Bulgaria, Montenegro, Macedonia, and the Czech Republic. Hungary’s business daily Világgazdaság reported on January 11, 2008, that the current coalition government, which consists of the Socialist Party, the senior member of the ruling coalition, and the market oriented Free Democrats, is considering four tax measures to boost economic competitiveness. The chosen measure is expected to take effect in January 2009.

One tax reform proposes to reduce the tax wedge on labor by lowering the social security contribution (payroll tax) from 29% to between 19-21%. Part of the lost revenue would be recovered with an increase in the value added tax from 20% to 22-24%.

Another would reduce the corporate tax burden either by lowering the current 16% corporate rate or abolishing the 4% solidarity tax imposed on corporations.

The remaining two reforms constitute alternative flat taxes. One would broaden the tax base by including social security contributions in the income tax base and slashing the rate to a very low level, which was the approach taken in the Czech Republic’s 15% flat tax. The other flat tax would be applied to personal income, excluding social security contributions from the tax base, and perhaps also applying the same flat rate to the corporate and value added taxes.

Coalition deliberations are expected to conclude in late January to permit the spring session of Parliament to enact the chosen measure into law.

2008-11-28T09:37:00.000-08:00

The Flat Tax Begins to Percolate in New Zealand

January 14, 2008

By Alvin Rabushka

New Zealand is scheduled to hold general elections for the 49th session of its parliament in late 2008, but no later than November 15, 2008, to comply with the convention that sessions shall not exceed three years. Current polls suggest that the opposition National Party will supplant the Labour Party as the leading vote-getter, but whichever wins a plurality of votes may have to form a coalition with the Green Party. Other minor parties include the Maori and the First-ACT parties.

Polls show that voters in the National, Green, Maori, and First-ACT parties favor a flat tax of 20% on both personal and corporate income, with the lost revenue to be recovered by increasing the Goods and Services Tax (a VAT) from 12.5% to 20%. A survey conducted by Shape NZ revealed that the combination of a 20% flat-rate personal and corporate income taxes coupled with a rise in GST tax was preferred by voters in the four parties to the alternatives of cutting the top personal rate from the current 39% to 30%, or setting the top personal and corporate rates (currently 33%) at 28%.

The New Zealand Business Council for Sustainable Development, which supports the 20% flat tax, maintains that it would encourage innovation and promote economic growth.

Shape NZ research can be accessed at www.shapenz.co.nz.

2008-11-28T09:34:00.000-08:00

The Flat Tax Spreads to the Canton of Obwalden in Switzerland

January 2, 2008

By Alvin Rabushka

Switzerland has a three-tiered income tax system in which income taxes are levied at the federal, cantonal, and municipal level. On average, about a third of all personal income taxes is collected at each level, although there is wide variation among the twenty-six cantons and some 2,900 municipalities. The federal income tax consists of nine brackets that range from 0% on the first Sfr 25,000 ($1 = Sfr1.13) to a top rate of 13.2%, after which it falls to 11.5% on income exceeding Sfr 716,500.

In January 2006 the Canton of Obwalden had previously established a degressive system of personal income tax rates that set lower rates with increases in taxable income. The Federal Court ruled this arrangement unconstitutional in June.

In response, Obwalden’s authorities proposed a flat income tax rate of 1.8%, exempting the first Sfr 10,000 of income from taxation. In a referendum, 90.7% of the electorate in Obwalden approved the measure. The new flat tax will take effect on January 1, 2008. The canton also reduced its corporate tax rate from 6.6% to 6%.

Under the pressure of tax competition to lure high-income individuals to reside in specific cantons, the cantons of Uri and Thurgau are also considering a flat-rate income tax. Should these two adopt a flat-rate income tax, it is likely that other cantons will consider the flat tax to retain their competitiveness for high income individuals.

2008-11-28T09:23:00.000-08:00

The Flat Tax in Jamaica

January 3, 2008

By Alvin Rabushka

The flat-tax revolution has mainly encompassed Central and Eastern Europe. It has also touched Central Asia and Africa. For completeness, it is desirable to include the case of Jamaica, which has thus far been overlooked in these comments on countries that have adopted flat taxes.

The first general income tax took effect in Jamaica in 1920. It included a small exemption and consisted of rates that ranged between 1-10%. The postwar modern income tax was enacted in 1955 with graduated rates that ranged from a low of 30% on the first J$7,000 of taxable income to a high of 57.5% on all income above J$14,000. The effective rate was lower due to sixteen tax credits of various amounts that enabled individuals to avoid or evade a portion of their income from taxation.

The government of Jamaica undertook a major tax reform in 1986. It replaced all tax credits with a standard deduction of J$8,580. (The exchange rate was US$1 = J$5.56 in 1985 on the eve of the reform.) The tax base includes the Jamaican dollar value of fringe benefits and payments for reimbursable and non-reimbursable expenses. Interest income became subject to tax, and the previous graduated-rate structure was replaced with a flat-rate tax of 33⅓%.

Subsequent changes reduced the flat rate to 25% effective January 1, 1993, and raised the standard deduction almost every year to compensate for inflation. Beginning January 1, 2007, the tax exempted the first J$275,000 in income (equivalent to US$ 3,567 at the January 3, 2008, exchange rate of US$1 = J$77.1) The tax on interest from banks and life insurance companies was also set at 25%.

The details and effects of the post-1986 reform, from which much of the forgoing information was taken, are set forth in a paper written by Sally Wallace and James Alm of Georgia State University entitled “The Jamaican Individual Income Tax”(August 2004). The paper is available at http://aysps.gsu.edu/publications/alm/jamaica_individtax.pdf.

2008-11-28T09:21:00.000-08:00

The Flat Tax is Implemented in Bulgaria

January 2, 2008

By Alvin Rabushka

Effective January 1, 2008, Bulgaria joins the raft of Central and Eastern European countries which have adopted the flat tax.

Bulgaria’s new 10% flat-rate personal income tax replaces the previous system of three graduated rates of 20, 22, and 24%. The new 10% flat tax applies to the first leva (BGN) of income, eliminating the previous annual tax-free threshold of 2,160 leva. ($1=BGN 1.34)

In 2006 the government reduced the corporate profits tax from 15% to 10%. Bulgaria now imposes a uniform 10% flat rate on personal and corporate income. To minimize double taxation, a 5% rate was imposed on dividends and capital gains. Sole proprietors are assessed at a flat rate of 15% on net income.

The next goal is a reduction in the social security tax to 10%.

2008-11-28T09:20:00.000-08:00

The Flat Tax at Work in Russia: Year Six, 2006

December 13, 2007

By Alvin Rabushka

The Federal Treasury of the Russian Federation has compiled the data for total taxes and revenues for the consolidated federal and regional budgets for 2006. The data show that the 13% flat tax on personal income continues to achieve very positive results.

In 2006, the Treasury collected 930.4 billion rubles ($1=RUB24.4) in personal income tax receipts, a nominal increase of 31.6% over the 707 billion rubles in 2005. After adjusting for annualized consumer price inflation of 9.0% in 2006, real personal income tax revenue rose 22.6% in 2006. Total real ruble revenue has more than tripled in the six years since the 13% flat tax was implemented on January 1, 2001. It should be recalled that the top marginal rate in 2000 was 30% before the implementation of the 13% flat tax. The low flat rate has contributed to the decline in capital flight, improved taxpayer compliance, and increased revenue.

The 13% flat tax has become a stable feature of Russia’s tax system. With the rise in real incomes percolating through the economy, receipts continue to grow at a healthy clip.

2008-11-28T09:19:00.000-08:00

The Flat Tax at Work in Montenegro

November 26, 2007

By Alvin Rabushka

In December 2006, Montenegro’s parliament approved a 15% flat tax on personal income. The new law sets the flat rate at 15% in 2007 and 2008, reduces it to 12% in 2009 and 9% in 2010. Montenegro has set the corporate profits tax rate at 9%, reduced from the previous two-rate system of 15% on taxable profit up to €100,000 and 20% on the gain exceeding €100,000. In 2010, Montenegro will have a unified flat tax of 9% on personal and corporate income.

The tax rate reductions have had a positive effect on bringing underground economic activity out into the formal economy, where it can be taxed, and improving compliance.

In a report released by Montenegro’s government, the tax administration collected 30% more revenue in the first 10 months of 2007 over the comparable period in 2006. For the month of October 2007 compared with October 2006, the increase in revenue consisted of a gain of 13% in personal income taxes, 100% in business profit taxes, 25% in value added taxes, and 150% in property taxes. These results mirror the same pattern that emerged in Russia, Romania, and other Central and Eastern European countries that previously adopted the flat tax as part of a process of tax reform and tax-rate reductions.

2008-11-28T09:18:00.000-08:00

The Flat Tax Expands its Ambit in Georgia

October 31, 2008

By Alvin Rabushka

Two recurrent issues in the United States are reforming the federal income tax and saving Social Security. The complexity of the federal income tax code, surpassing 66,000 pages of laws, regulations, and instructions, needs little elaboration. With baby boomers beginning to retire, the solvency of Social Security, with fewer workers supporting more retirees, is at risk. Politicians have been willing to propose various tax reforms, with little success since 1986, but have been more reluctant to take on Social Security. President George Bush tried, but failed, to push through a reform of Social Security that included private accounts.

In an article I published on December 4, 1998, in the editorial pages of the Wall Street Journal, I proposed linking Social Security and tax reform. My proposal called for extending the Social Security payroll tax of 12.4% to all wage income, rather than limit it to a wage cap of $68,400 (just under $100,000 today). Removing the cap would reduce the regressivity of the payroll tax, which taxes the first dollar of wage income, but ceases for wage income exceeding the cap. The additional revenue would make it possible to reduce the payroll tax rate by nearly 2%, and put Social Security and Medicare taxes on the same playing field. Subjecting capital income to the payroll tax would permit an even larger-reduction in the payroll tax rate.

The other half of the proposal, tax reform, would consist of a flat tax of 20 percent or less on income, with a large personal allowance that then would exempt the first $30,000 ($40,000 today) of income for a family of four. Taken together, the two taxes would be progressive, because a flat income tax would exempt the first $40,000 of income. The higher payroll taxes on wealthy Americans would by offset by a reduction in their marginal income tax rates. Altogether, a flat tax of 30-32%, with a substantial personal allowance, would fund both Social Security and the federal government, and greatly simplify the tax code.

Effective January 1, 2005, Georgia (the country, not the U.S. State) adopted a flat tax of 12%, replacing its previous four-bracket system. The flat tax was augmented with a 20% tax on corporate profits, 20% on social insurance (reduced from 33%), and 18% (reduced from 20%) on VAT.

The new, simpler system has had a dramatic effect on economic growth, averaging 10% a year for the past three years, and taxpayer compliance. Tax revenue increased from 14.5% of GDP in 2003 to 22% in 2006, and should reach 24% in 2007.

Between 2003 and 2007, the reforms reduced the number of taxes from 22 to 7. In 2008, the personal income tax and payroll tax are to be merged as a single tax at a flat rate of 25%. When this merger is consummated, Georgia will be the first country to adopt a single flat tax in lieu of both personal income and payroll taxes. Although Georgia is a small country of 4.4 million people, perhaps its tax reforms can serve as a model for the United States.

2008-11-28T09:16:00.000-08:00

The Flat Tax May Soon Spread to Poland

October 22, 2007

By Alvin Rabushka

On October 21, 2007, Polish voters turned out the sitting Law and Justice Party that had governed in a fractious coalition for the past two years. In its place, they gave a plurality of votes to Civic Platform, whose chairman, Donald Tusk, is set to become Poland’s next prime minister.

Civic Platform received 41.4 percent of the vote, which gives it 209 seats out of the 460 seats in the lower house. Mr. Tusk needs the support of another 22 lower house members to govern in a majority coalition. The leader of the moderate Polish Peasants Party, which received 8.9 percent of the vote and 31 seats, stated that his party was prepared to join Civic Platform in government, thereby providing a majority.

Civic Platform campaigned on economic themes of lower taxes and less spending. It promised to enact a 15 percent flat tax on both corporate and individual income. The flat tax would replace the current three-bracket system of 19, 30, and 40 percent imposed on individuals and reduce the corporate tax from its current rate of 19 percent.

Assuming that the new Polish government succeeds in enacting a flat tax, it would place Poland in line with many of its competitors in Central and Eastern Europe. Most of Poland’s neighbors—Estonia, Latvia, Lithuania, Russia, Ukraine, Slovakia, Czech Republic, Serbia, Montenegro, Macedonia, Albania, Georgia, Romania, and Bulgaria—have already adopted a flat tax. Passage in Poland would leave only a handful of countries in Central and Eastern Europe—Hungary, Slovenia, Croatia, Bosnia and Herzegovina, Belarus, and Moldova—clinging to graduated rates.

2008-11-28T09:15:00.000-08:00

The Flat Tax is Finalized in the Czech Republic

October 15, 2007

By Alvin Rabushka

The flat tax is now the law of the land in the Czech Republic. On October 5, 2007, President Vaclav Klaus signed into law the government’s tax reform plan. Previously, on August 21, 2007, by a narrow vote of 101 to 98, the Chamber of Deputies (the lower house of the Czech Parliament) approved the tax reform, followed on September 19, 2007, by a vote of 49 to 27 in the Senate (the upper chamber).

The reform is in two parts. One involves the personal income tax. Beginning January 1, 2008, the current system of four rates, 12, 19, 25, and 32%, will give way to a flat rate of 15%, followed by a further reduction to 12.5% in 2009. In exchange for the lower rates, social and health insurance contributions will be included in the tax base of the personal income tax. When the 12.5% rate takes hold, the flat rate on gross income will come to 19.4%.

The other involves the corporate income tax, which will be reduced from 24 to 21 percent in 2008 and to 19 percent in 2009. In effect, this puts the Czech Republic on a level playing field with neighboring Slovakia, which imposes a 19 percent flat rate on both personal and corporate income taxes.

2008-11-28T09:14:00.000-08:00

The Flat Tax is Likely to Spread to Bulgaria in 2008

August 29, 2007

By Alvin Rabushka

Bulgaria’s income tax system consists of a corporate income tax of 10% (reduced from 15% in 2006) and personal income tax of three graduated rates of 20, 22, and 24%, which puts personal rates above many of its neighbors. The last four countries to enact flat tax legislation, Macedonia, Montenegro, Albania, and the Czech Republic, have set rates, when fully implemented over the next few years, between 9 and 12½%.

Confirming earlier statements in late July of the prime and finance ministers that Bulgaria would move to adopt a flat tax to enhance the country’s economic climate, Economy and Energy Minister Petar Dimitrov said on August 15, 2007, that Bulgaria will definitely adopt a uniform flat tax on both personal and corporate income to take effect in 2008. The rate, as yet undecided, will be set at either 10 or 12%. The lower rate would match those in Albania and Montenegro. A personal allowance will exempt some income from tax, but the level has not yet been determined.

Bulgarian proponents of tax reform cite the success of Slovakia, which introduced its 19% flat tax in 2003. Slovakia has attracted billions of euros in investments, including Korean car-maker Hyundai and consumer electronics giant Sony, which, in turn, have attracted dozens of Hyundai and Sony subcontractors to the country.

Proponents of the flat tax emphasize its simplicity, with less red tape and time and money expended in filing tax returns. In simplifying its personal income tax, Bulgaria will also satisfy European Union complaints that Bulgaria is a nation with a cumbersome tax administration. Other anticipated benefits of the flat tax include a reduction in personal income taxes for a majority of the population, and bringing income out of the underground economy into the open market, thereby enhancing its efficiency for investment and increasing the base of income subject to tax. At 10%, individuals have less incentive to hide income compared with the current 24% top rate.

Bulgarian opponents object to the flat tax on the ground that it disproportionately benefits the more affluent population, which goes against their social principles of equity. However, a majority in Parliament believe the need to attract investment and create jobs requires that the country’s income tax system be competitive with its neighbors vying for the same investment.

If enacted, Bulgaria will join the bandwagon of thirteen other countries in Central and Eastern Europe that have enacted flat taxes since 1994: Estonia, Latvia, Lithuania, Russia, Ukraine, Slovakia, Serbia, Georgia, Romania, Macedonia, Montenegro, Albania, and the Czech Republic. If the territory of Pridnestrovie is treated as a country (rather than an integral part of Moldova), the number of flat-tax countries in Central and Eastern Europe would stand at fifteen.

Outside of Europe, other countries that have recently adopted a flat tax include Iraq, Kyrgyzstan, Mauritius, Mongolia, and Iceland (though Iceland’s 35.73% rate violates the principle that the flat rate should be low, preferably below 20%).

2008-11-28T09:12:00.000-08:00

The Flat Tax Spreads to the Czech Republic

August 27, 2007

By Alvin Rabushka

On August 21, 2007, by a narrow vote of 101 to 98, the Chamber of Deputies (the lower house of the Czech Parliament) approved a public finance reform package submitted by the center-right cabinet of Prime Minister Mirek Topolánek. Although the measure requires the approval of the Senate (the upper house of Parliament, where the ruling coalition has a majority), and the signature of President Václav Klaus, both are expected to approve the package. Opposition deputies pledged to revise the reform when they return to power. The current government in Slovakia made a similar pledge during the last election campaign, but once in office have made no serious attempt to undo the country’s 19% flat tax on personal and corporate income.

The reform package consists of two major changes in taxation. One involves the personal income tax. Beginning January 1, 2008, the current system of four rates, 12, 19, 25, and 32%, will give way to a flat rate of 15%, followed by a further reduction to 12.5% in 2009. In exchange for the lower rates, social and health insurance contributions will be included in the tax base of the personal income tax. When the 12.5% rate takes hold, the flat rate on gross income will come to 19.4%. (The information reported in several English-language press reports does not provide any details on the level of personal exemptions or if the tax base excludes any other deductions. Further details will be posted to this site when they become available.)

To maintain competitiveness with other Central and Eastern European countries, the package successively reduces the corporate tax rate from 24 to 21% in 2008, 20% in 2009, and 19% in 2010. These reductions will put the Czech Republic on an even playing field with its neighbor Slovakia.

This web site has chronicled the adoption of the flat tax around the world since its first adoption in Estonia beginning 1994. The list of countries in Central and Eastern Europe also includes Lithuania, Latvia, Russia, Ukraine, Serbia, Slovakia, Georgia, Romania, Macedonia, Montenegro, Albania, and Pridnestrovie (self-declared independent country adjoining Moldova, but which lacks international recognition). The remaining countries in the region that still retain multiple rates on personal income are Poland, Hungary, Slovenia, Bulgaria, Moldova, and Belarus.

New elections are anticipated in autumn 2007 in Poland, with one of the leading parties supporting a flat tax. Slovenia recently enacted a slight reduction in its personal tax rates, but rejected the flat tax. Bulgaria has narrowed its three rates to 20, 22, and 24%, which makes the prospect of its adopting a flat rate increasingly likely. At the time of this writing (late August 2007), there are no major movements toward a flat tax in Hungary, Moldova, and Belarus.