The 15 April edition of The Economist has two special features on what it calls The flat-tax revolution. The first piece starts by lamenting the "tax-code sclerosis" prevailing in most rich countries:
Revenue must be raised, of course. But is there no realistic alternative to tax codes which, as they discharge that sad but necessary function, squander resources on an epic scale and grind the spirit of the helpless taxpayer as well?
They argue a flat tax is a serious and practical alternative to current tax codes. The piece briefly addresses the two main objections. First, in response to the argument that a flat tax is 'Fine in theory, just not practical in the real world,' they respond that in Estonia and eight other countries it "seems to be working as well in practice as it does on the blackboard." The second objection is that a flat tax would undermine the progressive nature of income tax:
Enlightened countries, it is argued, have “progressive” tax systems, requiring the rich to forfeit a bigger share of their incomes in tax than the poor are called upon to pay. A flat tax seems to rule this out in principle. Not so. A flat tax on personal incomes combines a threshold (that is, an exempt amount) with a single rate of tax on all income above it. The progressivity of such a system can be varied within wide limits using just these two variables.
And in any event, the current tax system is not as progressive as claimed:
Under systems such as America's, or those operating in most of western Europe, the incentives for the rich to avoid tax (legally or otherwise) are enormous; and the opportunities to do so, which arise from the very complexity of the codes, are commensurately large. So it is unsurprising to discover, as experience suggests, that the rich usually pay about as much tax under a flat-tax regime as they do under an orthodox code.
This is true up to a point. But tougher enforcement and fewer exemptions and loopholes in the existing tax system can restore a substantial part of that intended progressivity. And surely it is naive to assume that under a flat tax regime where the rich still had to pay about as much tax as they do now, they would not seek out ways of minimising them? The piece concludes:
In tax reform, as [US tax reforms in] 1986 showed, the radical programme can suddenly look easier to implement than the timid package of piecemeal changes. Now and then, the bigger the idea, and the simpler the idea, the easier it is to roll over the opposition. The flat-tax idea is big enough and simple enough to be worth taking seriously.
The second piece, The case for flat taxes, outlines how flat taxes have worked in practice. It notes that "Estonia's economy has grown impressively since its 1994 reform", while income tax revenue has not fallen as a share of GDP. However "Estonia's robust revenues ...less than is frequently advertised" to the flat tax reform. Estonia depends heavily on another flat tax, VAT, for tax revenue - as does Slovakia, another country with a flat tax.
The piece also recounts the impressive impact of tax reform in Russia, citing the IMF study The Russian Flat Tax Reform by Anna Ivanova, Michael Keen and Alexander Klemm. That paper found the post-reform surge in tax revenue was due to a jump in wages and to stronger compliance, not the flat tax:
...there is no evidence of a strong supply side effect of the [flat tax] reform. Compliance, however, did improve quite substantially- by about one third according to our estimates - though it remains unclear whether this was due to the parametric reforms or to accompanying changes in nforcement.
Tax simplicity is good. Tax enforcement is even better.
I have problems with the whole argument. The tax rate or multiple tax rates has little or nothing to do with compexity in the tax system.
The complexity comes from defining what is income and how would shifting to a flat tax impact that?
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