But America is a laggard in the tax-reform revolution.
Next month’s report of the White House tax reform commission will likely stop short of advocating a complete scrapping of the tax code. But look for it to have warm words for how well the flat tax is promoting economic growth in the more than dozen places–ranging from Ukraine to Hong Kong–that have adopted variations of it.
It’s about time the concept of taxing all income at a single rate, which presidential candidate Steve Forbes and then-House Majority Leader Dick Armey broached a decade ago, once again takes center stage. It’s increasingly popular overseas, with Romania and the republic of Georgia adopting it last January. Greece is likely to introduce a 25% single rate for both corporate and personal income next month. If Poland’s opposition parties win next month’s elections they are likely to introduce a flat tax. In Italy, the Bruno Leoni Institute has just published an interview with former finance minister and current defense minister Antonio Martino detailing his support of the flat tax.
Even Germany, normally a center of intellectual stagnation when it comes to tax policy, has gotten the bug. Angela Merkel, the candidate of the conservative Christian Democrats in the Sept. 18 election, has appointed radical reformer Paul Kirchhof as her spokesman on taxes. While her party’s manifesto falls far short of advocating Mr. Kirchhof’s idea of a single rate of 25% for companies and individuals, she has stoutly defended his approach: “It’s important that there is a man who wants to go further in principle and, when there is room for maneuver, says, now we can go the next step.”
To everyone’s surprise the stodgy German media are now consumed with debate over the flat tax. Berlin’s left-leaning Der Tageszeitung noted that under Mr. Kirchhof’s proposal generous exemptions would mean a family of four would pay tax only on its portion of income that was over $42,000 a year. With the current German tax system now operating with 90,000 rules and 418 tax exemptions it asked, “Isn’t an understandable tax system good for all? . . . Kirchhof stands for clarity.” The center-right Frankfurter Allgemeine Zeitung, Germany’s most respected paper, noted that while the idea has been predictably attacked by unions and some business interests, “massive resistance by people representing particular interests and associations is the most certain sign that this is the right path to take.”
In Britain, die-hard opponents of the flat tax, such as Chancellor of the Exchequer Gordon Brown, were caught censoring portions of an internal Treasury paper on the subject that was obtained under the recently effective Freedom of Information Act. The unexpurgated version, leaked to the Daily Telegraph, found that a flat tax would likely make Britain more attractive to foreign investors, eliminate economic distortions and create a “mini-economic boom.” The paper noted that under flat-tax systems in other European countries the rich end up paying a larger share of total tax revenues. In flat-tax countries, taxpayers in the highest brackets move 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.
Indeed, the Brussels-based Center for a New Europe notes that none of the countries that have adopted the flat tax are seriously contemplating any retreat from it. Flat-tax pioneer Estonia is even reducing its rate by two percentage points a year until it drops to 20% in 2007. Since the tax’s inception in 1994, Estonia has had an average growth of 5.2% a year, and now also ranks fourth (out of 155 countries) in the Index of Economic Freedom, published by The Wall Street Journal and the Heritage Foundation.
After being mired in stagnation for years, in 2001 Russia implemented a flat tax of 13% for individuals, along with a 15% rate for most business income. The economy grew 7.3% last year, thanks in part to underground activity going legitimate, more than doubling revenues from income taxes. Even the New York Times, which opposes a flat tax in the U.S., has praised, President Vladimir Putin for “radically simplifying the code and slashing rates.” On a trip to flat-tax Slovakia earlier this year, President Bush, extolled those who are using the flat tax “to attract capital and create economic vitality.”
Here at home the flat tax is still routinely ridiculed. When Mr. Forbes floated the idea in 1995, President Clinton joked that Republicans were becoming “the party of flat-earthers and flat-taxers.” But he has also told friends privately that he got a real scare during the 1992 primaries when Jerry Brown championed a flat tax. Mr. Brown won applause from audiences by pointing out that under our current system the rich will always be able to hire experts to lobby for tax loopholes and avoid the higher rate traps set for them.
That logic and the practical realization of it in country after country is winning adherents from all walks of life in the U.S. Donald Trump is full of praise for Mr. Forbes’s new book, “Flat Tax Revolution.” Actor Clint Eastwood praises a flat tax because it would mean “a little old lady on a home computer [could do] the work of all these thousands of bureaucrats and accountants.” A variation on the flat-tax idea, junking the income tax in favor of a single-rate national sales tax is also gaining popularity. “The Fair Tax,” a new book by Rep. John Linder and radio talk-show host Neal Boortz, is currently topping best-seller lists.
So here’s hoping the Bush tax reform commission is bold enough to at least propose some steps towards a dramatic flattening of the income tax code. It may be a matter of long-term economic survival. America’s taxes on profits are around 40%, when you combine federal, state and local levies. With the possible exception of Japan, that rate is about the highest of any developed nation in the world today. If the U.S. doesn’t adopt the flat tax it may find itself losing jobs, capital and ambitious entrepreneurs to nations with a more ambitious growth agenda.
Alvin Rabushka, a senior fellow at Stanford’s Hoover Institution, believes it’s only a matter of time before one an emerging economic superpower like China or India goes the flat-tax route. His book on the subject has just been published in Chinese, with a preface by Lou Jiwei, the vice minister of finance. If China adopted a flat tax, more than a quarter of the world’s population would be filling out tax returns on the back of a postcard. That would leave them a lot of time and money to eat our economic lunch.