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Enlargement Tuesday 12 July 2005
Intro Euro New Neighbours Regional Policy Bulgaria Romania Croatia
Turkey W Balkans Labour Movement State Aid Turkey-Russia relations
Flat Tax Turkey accession and Cyprus
Published: Tuesday 1 March 2005 - 14:00
Sprachen: [DE]
Flat tax
In Short:
'Flat tax' is all the talk in the new member states these days, and
calls for tax cuts and simplification are also coming from elsewhere
in Europe. Meanwhile, divisions remain on its merits.
News on this topic (including press links):
High taxes do not hinder competitiveness, says report (13 May
2005)
The 'big bang' one year down the road (02 May 2005)
Policy Summary>> Links
QuickLinks: Background | Issues | Positions
Background:
Simply put, flat tax means that everyone is taxed at just one
rate. In such a system, in place of a complex set of income tax
brackets, the state declares a threshold above which all parties pay
a fixed rate on all their income. This threshold is normally low
enough to provide an incentive for the citizens to prefer paying
to dodging their taxes. Such a system taxes all income once and once
only, on its inception. As regards corporate taxes, the idea is
similar: one bracket should fit all.
Analysts are inclined to point out that while in the first half of
the 19th century the flat tax rate was the norm in the
industrialising states, the first loud calls for a heavy
progressive or graduated income tax came from Karl Marx in his 1848
Communist Manifesto. Eventually, however, it was the capitalist part
of the world that adopted Marxs call.
Since then, the idea has been resurrected a number of times, with
quite a number of countries adopting one version or another of the
flat tax regime. And yet, for all the recurring debates, to date
no "major" Western economy has switched over (or back) to a
flat-rate income tax regime.
According to popular belief, taxpayers all over the world take some
eight billion man-hours each year to fill out their tax returns.
The modern-day renaissance of the flat-rate income tax was initiated
by Estonia in 1991, followed by Latvia (1994), Lithuania (1994),
Russia (2001), Serbia (2003), Ukraine (2003), Slovakia (2003),
Georgia (2004) and Romania (2005). Hungary, for one, has for now
declined to jump on the flat tax bandwagon.
Issues:
Although flat tax is not touted as a panacea to all economic ills,
an increasing number of European countries among them a few new EU
member states have introduced or are developing one-size-fits-all
tax regimes. Most of these countries are confronted with sizeable
budget deficits, and several face the need to align their economic
status with the eurozone's requirements.
Flat tax is believed to:
help reduce red tape and associated difficulties and confusion
reduce inequity (same rate for all)
counterbalance tax dodging and cheating
provide incentives to work, save and invest
generate increased tax revenue, and thus
spark off a 'mini economic boom'
At the same time, a flat tax regime is understood to
eliminate practically all forms of tax exemptions and allowances
be non-progressive (at least as far as the 'marginal' rates are
concerned)
favour the wealthy at the expense of the poor
favour share and dividend-holders since profits are taxed only
once, at source (ie 'flat tax' is a consumption-based tax)
Whether the seemingly popular switch over to a flat tax system is
driven by sound fiscal policy strategies or rather by a desire to
somehow make the citizens pay more into the states coffers is a
moot point. One key conclusion cited by several researchers is that
the efficiency and success of a flat rate regime is inherently
dependent on the actual level of the tax rate: the lower it is, the
more efficient it tends to become.
Experts also call attention to the fact that a countrys
competitiveness is determined by a number of other factors besides
its tax system or the type of support the country gives to new
investments. While it is generally true that lower taxes leave more
money to circulate and thus to be invested in an economy, and
that flat rates generally increase the citizens willingness to pay
their taxes, lower taxes may also mean lower tax revenues, which in
turn may be detrimental to the given states budgetary status.
Furthermore, some leaders of Europes stronger economies, among them
German Chancellor Gerhard Schrder and Swedens Prime Minister Goran
Persson have said that the Eastern 'transition' economies can afford
to cut taxes not least because any lost revenue is more than
compensated by hefty subsidies from the EU. This argument has
repeatedly been refuted by those 'transition' states affected.
Meanwhile, Germany, as well as Italy, Austria, Finland, Denmark and
Greece have also decided to introduce tax cuts in various forms and
brackets in order to boost investment and spending and spur growth.
During the past two years, the changes were as follows:
Top income tax and corporate tax rates in the EU-25 and the four
candidate states (source: Heritage Foundation and national reports):
Income taxCorporate tax
2004 - 20052004 - 2005
Austria50 - 5034 - 34
Belgium50 - 5033 - 34
Bulgaria29 - 2915 - 19.5
Croatia35 - 4520 - 20
Czech Republic32 - 3231 - 28
Cyprus30 - 3015 - 15
Denmark59 - 26.530 - 30
Estonia26 - 260 - 0
(on reinvested profits)
Finland36 - 35.529 - 29
France49.6 - 49.634.3 - 34.3
Germany48.5 - 4727.9 - 26.4
Greece40 - 4035 - 35
Hungary40 - 3818 - 16
Ireland42 - 42 12.5 - 12.5
Italy45 - 45.634 - 34
Latvia25 - 2519 - 15
Lithuania33 - 3315 - 15
Luxembourg38.95 - 38.9530.38 - 22.9
Malta35 - 3535 - 35
Netherlands52 - 5234.5 - 34.5
- Poland40 4027 - 19
Portugal40 - 4030 - 30
Romania40 - 4025 - 25
Slovakia38 - 1925 - 19
Slovenia50 - 5025 - 25
Spain48 - 4535 - 40
Sweden60 - 6028 - 28
Turkey40 - 4033 - 30
United Kingdom40 - 4030 - 30
Positions:
The Commission believes that there is no need for an
across-the-board harmonisation of the member states' tax systems.
Provided that they respect Community rules, member states are free
to choose the tax systems that they consider most appropriate and
according to their preferences. Meanwhile, the EU continues its
fight against what it considers harmful tax competition.
"Income tax is not only complex, it is perverse, diverting energy
and resources into uneconomic behaviour forced upon people by the
tax code itself," argues economist Andrei Grecu of the Adam Smith
Institute. "In terms of growth foregone and effort misplace, its
economic costs reach into billions of pounds each year, maybe tens
of billions." Flat tax is an idea whose time has come and there
will be enormous advantages for the party that embraces it, argues
the institute's president, Madsen Pirie.
Proposals for a flat rate of income and corporate tax would increase
investment in Europe's largest economy, said German government
adviser Wolfgang Wiegard, a member of the panel that drew up a plan
for the German Finance Ministry. Under the plan, Germany should
introduce a flat tax of 30% on all personal and corporate income.
"Most elder members of the panel favor the flat tax," Wiegard said.
"It's the younger economists who prefer the dual income tax.''
However, German economist Alexander Klemm has told BBC News that
according to analyses conducted in Russia following the introduction
of the flat-rate income tax in 2001, overall the tax reform was
certainly not paying for itself, in the sense that cutting tax rates
has not led to higher tax revenues.
Poland is planning to table proposals for a flat tax in early 2007,
not in 2006 as previously signaled, said Zbigniew Chlebowski, deputy
leader of the Civic Platform (PO) parliamentary group, which is
widely expected to win the next general elections in June 2005. The
move will be part of tighter fiscal policy measures, he said.
According to former Hungarian Prime Minister Viktor Orbn, leader of
the main conservative opposition party FIDESZ-MPP, Budapest will
have no choice but to jump on the flat tax bandwagon in order to
maintain the countrys competitiveness and retain a fair share of
foreign investments. However, Economic Affairs Minister Jnos Kka
has said that for now, Hungary "prefers not to follow the fad".
Czech Prime Minister Stanislav Gross is also in favour of a
simplified tax system. However, while announcing that his country's
growth rate is twice as high as that of the eurozone average, he
also said that Prague will not introduce a flat tax rate.
"In the run-up to accession, the EU asked the newcomers from Central
and Eastern Europe to phase out all discriminatory tax incentives,
in particular those for foreign investors," writes Katinka Barysch
of the Centre for European Reform. "To keep their economies
attractive, many of the new members have responded by cutting
overall tax rates for both domestic and foreign investors. Since
these cuts are not discriminatory, there is nothing the EU can or
should do about them. So why are some old EU members so upset about
East European taxes? Perhaps some governments want to divert
attention from the pressing need to clean up their own tax systems".
"Economists can debate the theory endlessly. Everyone has neat
curves showing government revenue rising as taxes fall, and vice
versa. Yet this debate doesnt have to be conducted in charts, or
tested only in lecture halls," writes Matthew Lynn, a columnist for
Bloomberg. Flat taxes have been introdu...