[FoRK] Flat-tax movement stirs Europe
Adam L Beberg
beberg at mithral.com
Tue Mar 8 17:04:03 PST 2005
Now that a flat tax is a economic must if you want the global megacorps
to favor you with jobs, how can the US and other welfare states
implement it while somehow keeping it so a majority of corporations and
millionaires pay zero taxes?
Oh wait, our government is old enough to be 100% corrupt already :)
Adam L. Beberg
Flat-tax movement stirs Europe
Tue Mar 8, 9:28 AM ET
In the past year, three more nations have adopted flat rates.
By Andreas Tzortzis, Correspondent of The Christian Science Monitor
BRATISLAVA, SLOVAKIA - A few years ago, Martin Bruncko studied the flat
tax at Harvard University. Today, the 28-year-old is flying to European
cities to promote the idea, which he made a reality in his native Slovakia.
"In theory it was interesting, but we never thought we could do it in
practice," says Mr. Bruncko, recalling class discussions at the Kennedy
School of Government. "So it was fun to see that you actually can do it."
What flat-tax advocates like Steve Forbes (news - web sites) and the
Hoover Institution's Alvin Rabushka have been pushing in the United
States for decades, Bruncko and a team of Western-educated wunderkinds
in this country of 5 million achieved in one year.
Last January, Slovakia became the sixth Eastern European country to
adopt a flat tax, which means all income-earners pay the same rate.
Since then, Romania and Georgia have followed suit, creating a global
proving ground for the concept. In the process, flat-taxers have moved
Eastern Europe from a Communist backwater to an investment spring -
pressuring its higher-taxed Western neighbors to adapt to the new
US conservatives, meanwhile, hope the experience of flat-tax countries
like Slovakia - which the World Bank (news - web sites) named top
economic reformer last year - will persuade President Bush (news - web
sites) to implement a flat-tax of his own.
Mr. Bush praised Slovakia's tax-reform efforts during a trip there last
month. "I really congratulate ... your government for making wise
decisions," he said.
Western Europe feels differently. To support large governments and
sizable welfare payouts, many Western European countries impose a
triple-tiered tax regime of Value-Added Taxes (VAT), akin to a sales
tax, high taxes on corporate revenue, and personal tax rates that can
exceed 50 percent. Eastern Europe's cheaper labor market and growing
reliance on flat taxes leave Western European economies struggling to
"I believe it is putting some pressure on some of these countries and I
think ultimately that pressure comes through competing economies," says
Kevin Waddell, vice president and director of the Boston Consulting
Group in Poland.
Leaders such as Chancellor Gerhard Schröder say that the Eastern
European countries steal business with their low tax rates while at the
same time benefiting from European Union (news - web sites) (EU) aid.
Last year, former French Finance Minister Nicolas Sarkozy said that if
the new states were "rich enough" to introduce a flat tax they wouldn't
need EU funds. France and Germany want to harmonize tax rates within the
EU, and bring flat-tax rebels under a unified code.
With such heavy budget obligations, countries such as France and Germany
reject flat taxes because they wouldn't be able to afford a cut in their
tax revenues, says Wolfgang Wiegard, chairman of the German Council of
Last summer, Mr. Wiegard's council, dubbed the "wise ones" in Germany,
recommended that the government introduce a flat tax of 30 percent to
replace the country's average rate of 38 percent. Such a system would
make Germany "internationally competitive," he said.
The government ignored the advice, preferring Wiegard's alternate
recommendation of a system that would tax capital income and labor
Much of Western Europe has likewise spurned flat-tax proposals, but some
nations have chosen to follow, rather than beat, their flat-tax rivals.
Austria, whose neighbors include Slovakia, Hungary, and the Czech
Republic, lowered its rates from 50 percent on corporate and personal
income to 34 percent this year. Britain, mindful of Ireland, another
low-tax haven for companies, and Spain are reportedly mulling over the
same. But the prospect that more countries will follow suit is less likely.
"The challenge that Western Europe has is that you have a lot of
entrenched interest groups," says Waddell. "When you try and put in
place a flat tax, you take something away from somebody else."
Like most Eastern European countries, Slovakia looked west when
developing its tax system after the fall of the Iron Curtain. The
resulting five-bracket system featured deductions for everything from
home ownership to computer purchases.
"It was not a stable system, and super complicated for small and
medium-sized companies," says Bruncko.
Flat taxes used to be the norm in Western countries. But in the 19th
century, Communism founder Karl Marx listed a "heavy progressive" tax as
a top priority. Soon, higher income-earners were being taxed at higher
rates around the world. The irony today is that every flat-tax country
(except Hong Kong) is a former Communist nation.
Since the flat-tax took effect last year in Slovakia, rich and poor
alike pay a 19 percent tax on their income. A corporate tax and VAT of
19 percent is also levied. A percentage of the tax is deducted from
paychecks every month, and there are only two exemptions: one for
pensions and one for contributions to Slovakian NGOs.
Flat-tax advocates - and there are many here - say the reform has
encouraged tax compliance and added to the flow of foreign investors.
But a small chorus of critics here worries that the uniform rate will
mean less money for social services and make it difficult on the working
"I'm not sure it's fair to those people," says Pavol Pasca, an
opposition member of parliament from the eastern Slovakian city of
Kosice, where he says wages are 40 percent of the EU average. "Maybe
it's fair in a more-developed country with a bigger middle class."
But Mr. Pesca, like the rest of Slovakia's opposition politicians, has
few concrete arguments against the flat tax. In fact, he agrees with the
government's argument that the simplicity of the new code has led to
more transparency and less tax evasion. It has become one of Slovakia's
best selling points.
"We did heavy marketing of it, and explained it to business people,"
says Bruncko, who became the finance minister's chief economic adviser
shortly after graduating from Harvard in 2003.
"We have a much cleaner system," says Ivan Kocis, cochairman of the Euro
Valley Industrial Park, which lies on the highway to Prague, a half hour
out of Bratislava.
The park, situated in the valley that separates the Alps from the
Carpathian mountain range, is a symbol for the future that Slovakia
would like to see. Italian tire-maker Pirelli and multinational steel
concern Arcelor are building facilities here. And last month, a joint
venture between a German transmissionmaker and Ford Motor Company
announced a $395 million investment in eastern Slovakia.
The flat tax is "a very important factor," for these new companies, says
Trade experts say foreign investment has been flowing into Slovakia at a
higher rate since the tax reform.
In 2003, the government's trade development agency, SARIO, brought in 22
investment projects that created 7,500 new jobs. In 2004, it brought in
47 projects worth more than 12,700 jobs.
Bruncko is gratified by Europe's shift toward lower rates, but says the
flat tax is not a panacea. "It's a good and necessary basis for fast
growth," he says. "But you lose the advantage in the long term."
For now, it appears to be helping Slovakia. After months of talking to
business leaders across Europe, Bruncko had to cancel trips to Lisbon
and Madrid last month. Word on his country's tax reform, it seems, had
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