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.

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.

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.

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%.

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.

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.

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.

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.

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.

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%.

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.

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.

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.

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.

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.

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%).

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.

A Low Flat Tax Has Been Adopted in Pridnestrovie

August 17, 2007

By Alvin Rabushka


The people of Pridnestrovie regard their land as an independent country, although it has not been internationally recognized as a sovereign state. The jurisdiction’s full name is Pridnestrovskaia Moldavskaia Respublica (Pridnestrovian Moldavian Republic), and it is sometimes referred to as Transnistria. Its long western border is contiguous with the eastern border of Moldova. Its residents contend that on June 28, 1940, Stalin used the Molotov-Ribbentrop Pact, which created spheres of influence for Germany and Russia over several Eastern European countries, to join Pridnestrovie with Moldova. The pact was subsequently annulled, which led Pridnestrovie to argue that Moldova’s claim of sovereignty over its territory is invalid. Following a nationwide referendum, Pridnestrovie declared independence on September 2, 1990.

Despite the lack of international recognition, Pridnestrovia exercises de facto political power. The territory maintains its own border guards and customs inspectors, its own professional military, nine political parties, and its own symbols of nationhood (flag, coat of arms, national anthem, local currency, postage stamps, passports, and constitution). It has its own president, parliament, executive, and judiciary, and a separate national budget of $250 million.

Pridnestrovie introduced its own taxation system shortly after its declaration of independence. On July 13, 2006, its parliament enacted a 10 percent flat tax on personal income, with an exemption of $100 a month ($1,200 a year). The 10 percent flat rate was a reduction from the previous rate of 15 percent, and a higher rate of 30 percent enacted in 2001. The government reduced the rate to maintain competitiveness with such Southeastern European nations as Macedonia, Montenegro, and Albania, which have set their rates at 9-10 percent.

Earlier in 2000 the legislature enacted a sales tax, and used the proceeds to abolish and replace five kinds of taxes—a value-added tax, a tax on profits, a road tax, a property tax on legal entities, and a fuel tax. As in other European countries, Pridnestrovie imposes a social insurance tax (reduced from 35 percent in 2001 to 24 percent in 2005). The remaining taxes include a fixed tax on agribusiness and a tax on the use of natural resources.

The Flat Tax May Soon Spread to Bulgaria

August 1, 2007

By Alvin Rabushka


Bulgaria is on the brink of joining the flat-tax revolution that has swept throughout Central and Eastern Europe. Most of its neighbors, including Albania (flat rate of 10% in 2008), Romania (16%), Slovakia (19%), Serbia (14%), Macedonia (10% in 2008), Montenegro (9% in 2010), Georgia (12%), Ukraine (15%), Russia (13%), Estonia (18% in 2011), Latvia (25%), and Lithuania (24% in 2008) have adopted a flat tax in one form or another since 1994. The Czech Republic is currently proposing a unified 15% flat tax on corporations and individuals.

The politics of the flat tax in Bulgaria combines the left and right The ruling coalition in Bulgaria consists of three main parties. The largest is the Bulgarian Socialist Party. The other two are liberal (market-oriented) parties, the National Movement Simeon II and the Movement for Rights and Freedoms.

In 2006, Bulgaria reduced its corporate tax rate from 15% to 10% to enhance the country’s attractiveness to investors. Over a year later, on July 29, 2007, Bulgaria’s Finance Minister Plamen Oresharski announced that the leaders of the three main parties had decided at a cabinet meeting to propose a 10% flat-rate tax on personal income beginning in 2008. It would replace the current three-bracket personal income tax system which exempts the first 2,160 in annual Bulgarian Levas (US$1 = BGL 1.43), followed by a rate of 20% on income between BGL 2,161-3,00l, 22% on BGL 3,001-7,201, and 24% on income exceeding BGL 7,201.

Two days later, on July 31, 2007, Prime Minister Sergei Stanishev stated that the flat tax would increase revenue by reducing the underground economy, bringing this income to light and making it subject to taxation. The philosophy underlying the proposed flat rate of 10% is to apply a low tax rate to a broader base of income, replacing the current higher rates with numerous deductions that narrow the tax base. When the 10% flat tax on personal income is in place in 2008, the country will have a unified 10% income tax on corporations and individuals.

The government plans to introduce the proposed reform in parliament by the end of September after the summer recess. It appears likely to pass since the socialist-liberal coalition government enjoys a comfortable majority in Bulgaria’s parliament.

The Flat Tax Spreads to Albania

June 6, 2007

By Alvin Rabushka


On May 30, 2007, Albania’s parliament approved a 10% flat tax on personal and corporate income. Based on its success throughout Central and Eastern Europe, Prime Minister Sali Berisher has been a strong supporter of the flat tax. The government hopes to implement the 10% flat tax on personal income by July 1, 2007. It replaces the previous system of five rates, 5% on monthly income between 14,000-40,000 leks ($1=91.62 ALL), 10% between 40,000-90,000 leks, 15% between 90,000-200,000 leks, 25% between 200,000-500,000 leks, and 30% over 500,000 leks. Dividends received by individuals remain taxed at 10%. The 10% tax also replaces the small business tax rate of up to 30% that applies to individuals.

The 10% corporate income tax replaces the current 20% rate on profits.

The Albanian government stated that its enactment of a 10% flat tax was intended to create a friendlier investment climate, make the economy more competitive, attract foreign direct investment, encourage the legalization of the shadow economy, and simplify tax collection.

Estonia Plans to Reduce its Flat-Tax Rate

March 26, 2007

By Alvin Rabushka


Estonia was the first country in Central and Eastern Europe to enact a flat tax on personal and business income. Taking effect on January 1, 1994, the rate was set at 26%. Since then the rate has been lowered to 22% and the corporate profits tax abolished, except for distributed dividends that are taxed as personal income at the flat rate.

Estonia held its most recent national election on March 4, 2007. The Reform Party of Prime Minister Andrus Ansip secured the most votes with 27.6% of the electorate, many of whom voted on line in Estonia’s highly-wired society. The parties holding coalition talks include the Reform Party, the Pro Patria Party of former Prime Minister Mart Laar, the Green Party, and the Social Democratic Party.

The Baltic News Service reported on March 13, 2007, that the four Estonian parties agreed on tax reform that would reduce the flat-tax rate to 18% and raise the monthly tax-free allowance to 3,000 kroons ($254) by 2011.

The leading Reform Party does not plan to stand still at 18%. On page 35, in an article published in the Finnish business magazine Talouselämä on March 9, 2007, Secretary-General Kristen Michal of the Reform Party stated that it was Prime Minister Ansip’s goal to lift Estonia to one of the five wealthiest countries in Europe. How was this to be done? The first item in his list of economic measures was to reduce the flat-tax rate to a much lower 12%.

Estonia’s budget has been in surplus in each of the last five years. Revenues are growing at double-digit rates. At a conference held in Tallinn on August 28, 2006, sponsored by the Finnish Business and Policy Forum EVA, Prime Minister Ansip was asked if he would like to add extra brackets to the country’s tax system to make it more progressive like Finland. Ansip replied that his government’s revenues had increased 22% and 15% respectively in the past two years, which made it difficult for him to complain about Estonia’s flat tax. Indeed, his biggest problem was how to spend public money wisely, without waste.

The Flat Tax Spreads to Montenegro

April 13, 2007

By Alvin Rabushka


In December 2006, Montenegro’s parliament approved a 15% flat tax on personal income. Effective July 1, 2007, it replaces the previous system of three rates of 16% on monthly taxable income between €65-218, 20% on monthly taxable income between €218-381 euro, and 24% on monthly taxable income exceeding €381 euro. (€1 = $1.35) 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. This will be one percentage point less than the 10% unified rate in Macedonia, two points below Georgia, and three points less than Russia and Ukraine.

The flat tax movement in Montenegro was initiated in March 2004 by the Montenegro Business Alliance, a private Chamber of Commerce (www.visit-mba.org). Further information on Montenegro’s flat tax and its investment climate can be obtained from Dr. Petar Ivanovic, Director of the Montenegrin Investment Promotion Agency (www.mipa.cg.yu)

The flat tax has also been put on the agenda in three more countries. On March 13, 2007, Prime Minister Sali Berisha of Albania secured approval of the Strategic Planning Committee that he chairs for a unified 10% flat tax on personal and corporate income. The proposal has been sent to Albania’s parliament for its consideration. If enacted in a timely manner, the 10% tax on personal income would take effect on July 1, 2007. The proposed 10% flat tax on would slash Albania’s corporate 20% tax in half effective January 1, 2008. The reform will streamline the fiscal system, eliminating the arbitrage between the corporate tax, dividends, and the personal income tax.

In the Czech Republic, the government announced a raft of major tax reforms on April 2, 2007. If approved by the Czech parliament, the proposals set forth by Finance Minister Miroslav Kalousek would, effective January 1, 2008, levy a 15% flat tax on personal income, replacing the current system with four rates of 12, 19, 25, and 32%. The reforms also include a reduction in the corporate tax rate from 24% to 19%, putting the latter in line with those in neighboring Slovakia and Poland. The proposals face a struggle in parliament with only half the seats held in the Chamber of Deputies by ruling coalition parties.

In late March 2007, Prime Minister and Nobel prize winner Jose Ramos-Horta of East Timor set forth a tax reform plan designed to encourage the local business sector, attract foreign investment, largely from Australia, and create jobs. Ramos-Horta plans to transform East Timor into a free-trade nation, with no tariffs, sales tax, or excise taxes save on dangerous substances. He proposes to set personal and corporate income tax rates at the same flat rate between 5 and 10%. His proposal is being drafted into law based on consultations with the World Bank, the United Nations Development Program, academics, and the International Monetary Fund. Although the IMF had pushed for a flat rate between 15 and 20% to prevent East Timor from becoming a tax haven, the availability of oil revenue permits a lower rate, which minimizes the need to spend resources on tax collection.

The Flat Tax Spreads to Mongolia

January 30, 2007

By Alvin Rabushka


In 2006, Mongolia’s parliament enacted a far-reaching tax reform. Effective January 1, 2007, personal income is taxed at a 10% flat rate, with a tax-free allowance of MNT (Mongolia Tugriks) 84,000 ($866/year). Previously, from May 1, 1997, personal income was taxed at three rates of 10, 20, and 40%, with the top rate reduced to 30% in 2004, and an allowance of 48,000 MNT ($495/year). The decision to adopt a 10% flat tax reflected several important principles of tax policy: decreasing the tax burden on individuals, reducing the underground economy, broadening the tax base, increasing the efficiency of tax collection, and improving compliance by clarifying and simplifying the tax laws.

In addition to the adoption of a 10% flat tax on personal income, the government of Mongolia also lowered its value-added tax from 15% to a flat 10%, and reduced the corporate income tax from two brackets of 15% and 30% to 10% and 25% respectively. Losses in revenue from reductions in the rates of personal, corporate, and value-added taxes are to be offset with an increase in taxes on the mining sector, and a tenfold rise in gambling tax.

Flat and Flatter Taxes Continue to Spread Around the Globe

January 16, 2007

By Alvin Rabushka


The flat tax continued to pick up steam in 2006, spreading beyond Central and Eastern Europe.

On February 1, 2006, President Kurmanbek Bakiyev of Kyrgyzstan (Kyrgyz Republic) signed into law modifications in the country’s tax code that established a 10% flat tax. Kyrgyzstan’s flat tax replaced its current corporate tax of 20% and individual income tax rates between 10-20%. Shortly thereafter, the president of neighboring Kazakhstan said that his country would consider a flat tax in 2007.

In late May 2006 the government of Kuwait indicated that it was studying a proposal to introduce income tax at a flat rate of 10%. The draft law is to be studied by the cabinet and, if approved, sent to the country’s parliament for consideration.

In August 2006, Uzbekistan’s parliament adopted its budget for 2007, which provides for several significant tax cuts. The corporate rate will be set at 10% in 2007, down from 12% in 2006. Personal rates will be cut from 20% and 29% to 18% and 25% respectively.

On July 5, 2006, the people of Macedonia voted to establish their own country. The inaugural session of the new parliament met on July 26. President Branko Crvenkovski appointed a new prime minister, Nikola Gruevski, leader of the rightist VMRO-DPMNE, to establish a government. Gruevski announced a 100-point reform program. One of its main pillars is the flat tax. It was set at 12% beginning January 2007, and will be reduced to 10% a year in 2008. The flat tax will replace the current corporate tax of 15% and personal income tax rates between 15-24%. The government stated that the purpose of the low 10% flat tax is to make Macedonia a country with one of the lowest tax rates in Europe in order to emulate the success of Estonia, Latvia, and Lithuania, which experienced strong economic growth after the adoption of their flat taxes.

The tiny island of Mauritius, located in the Indian Ocean about 1,500 miles off the southeast coast of Africa, approved its 2006-2007 budget in July 2006. The signal feature of the budget is the advent, on July 1, 2009, of a 15% flat tax on personal and corporate income. The flat tax will replace the current personal income tax of two rates, 15% on taxable income to 25,000 rupees (about $800) and 25% on the rest. It will eliminate much of the complexity and many of the current deductions and credits in the current system. The 15% flat tax will also replace the existing 25% rate on corporate income.

Poland has moved three-quarters of the way to a flat tax. Apart from the taxation of wages and salaries, which are taxed at three rates of 19% (up to $12,340 annual taxable income), 30% ($12,340-24,680), and 40% (over $24,680), all other income in Poland is subject to a flat 19% rate. This includes corporations, self-employed individuals, capital gains, and dividends.

Montenegro, which achieved independence in a referendum in May 2006, has implemented a corporate tax rate of 9%, reduced from two rates of 15% and 20%, giving it one of the lowest corporate rates in Europe. Montenegro taxes personal income at graduated rates of 16% (€780-2,616 taxable income), 20% (€2,616-4,572), and 24% (over €4,572). It is likely that Montenegro will join its neighbors with an across-the-board flat tax sometime in the near future.

In Bulgaria, the standard rate of corporate income tax was set at 15% in 2006. Effective January 1, 2007, the rate was cut to 10%. Personal income is taxed at three rates of 20% ($1,440-1,500 taxable income), 22 ($1,500-4,800), and 24% (over $4,800).

If it forms a government with a parliamentary majority in 2007, a center-right coalition of three parties—the Civic Democrats (ODS), the Christian Democrats (KDU-CSL), and Greens—plan to enact a flat tax of 17-19% on companies and individuals. The flat tax would replace four brackets for individuals ranging from 12-32% and the corporate 24% tax.

Since January 1, 2007, Iceland taxes all personal income at a flat rate of 35.73%, which consists of the central government’s 22.75% tax rate and the municipal 12.98% tax rate. The central government surtax, levied at 7% during 1998-2003, gradually reduced to 2% in 2006, has now been eliminated. Interest, dividends, capital gains, and rental income are taxed at a 10% flat rate. A wealth tax was abolished at the end of 2005. The corporate tax rate is 18%, down from 30% in 2001. The rate on partnerships is down from 38% in 2001 to 26% in 2007.

On November 29, 2006, Spain promulgated significant changes in its tax laws. Income derived from savings is subject to a flat rate of 18%. Effective January 1, 2007, the company tax rate of 35% was reduced to 32.5%, and will fall further to 30% in 2008. Small and medium-sized companies experienced a drop in their tax rate from 30% to 25%. Personal income is taxed at four rates, with the top bracket cut from 45% to 43%.

Two other developments warrant mention. Guernsey, a British Crown dependency in the Channel Islands off the west coast of France, has had for many years a 20% flat tax on corporate and personal income. On July 10, 2006, its parliament approved a zero corporate tax rate and capped the maximum tax on individuals at £250,000. The cap means that tax rates decline once taxable income exceeds £1,250,000, transforming the territory’s flat tax into a degressive tax.

The Isle of Man, a Crown dependency located in the Irish Sea between Great Britain and Ireland, reduced its corporate tax rate for trading companies from 10% to zero beginning April 5, 2006. Personal income will continue to be taxed at two rates, 10% and 18%, but be capped at £100,000, reducing tax rates on those with incomes exceeding £570,000 a year.

The Flat Tax at Work in Russia: Year Five, 2005

May 11, 2006

By Alvin Rabushka

The Ministry of Finance of the Russian Federation has reported provisional data for total taxes and revenues for the consolidated federal and regional budgets for 2005. The data show that the 13% flat tax on personal income continues to achieve very positive results.

In 2005, the ministry collected 707 billion rubles ($1 = R27) in personal income tax receipts, an increase of 23.1 percent over 2004. After adjusting for annualized consumer price inflation of 10.95% in 2004, real personal income tax revenue rose 10.9%. This builds on real ruble revenue increases of 25.2% in 2001, 24.6% in 2002, 15.2% in 2003, and 14.4% in 2004. Total real ruble revenue has increased 128 percent (more than doubled) in the five years since the 13% flat tax was implemented. It should be recalled that top marginal rate in 2000 was 30% before the implementation of the 13% flat tax on January 1, 2001. The low flat rate contributed to the decline in capital flight, improved taxpayer compliance, and increased revenue. To further the culture of compliance, several prominent Russians have been jailed on charges of tax evasion.

Other tax revenues have shown even healthier increases. In real ruble terms, after adjusting for inflation, corporate profits taxes rose 38.4%, value added taxes, 24%, taxes, dues and regular payments for the use of natural resources (severance tax), 44.4%, and taxes on external trade and foreign economic operations, 78.3%. The high price of oil and other natural resources accounts for the rapid growth in tax revenues from corporations, value added taxes, severance, and external trade. The remaining categories of excises, property taxes, and the single social tax declined.

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.

A Competitive Flat Tax Spreads to Lithuania

November 2, 2005

By Alvin Rabushka

On June 7, 2005, Lithuania’s Parliament approved a major reduction in the country’s personal income tax law, cutting the 33% flat rate on wages and salaries to 27% from July 1, 2006, and to 24% from January 1, 2008. This puts the country’s flat-tax rate in line with Estonia, currently 24%, which is scheduled to fall by one percent over each of the next four years to 20% by 2009, and Latvia, which has a flat rate of 25%. A 15% flat rate on royalties, interest, and other sources of income remains unchanged.

Earlier, on March 24, 2005, Prime Minister Algirdas Brazaukas stated that his country planned to make this move “to bring Lithuania in line with other countries in Central and Eastern Europe that either have low flat tax rates or intend to implement them.” The stated reasons for the approved reduction in the flat rate from 33% to 24% over the next three years are (1) to increase the competitive ability of Lithuania in the region and the country’s attractiveness to foreign investors, (2) reduce tax evasion and avoidance, and (3) lower the tax burden on individuals.

With a flat rate of 24%, Lithuania becomes the ninth country in Central and Eastern Europe to adopt a low flat tax. The others are Estonia and Latvia, mentioned above, Russia and Ukraine at 13%, Slovakia at 19%, Serbia at 14%, Romania at 16%, and Georgia at 12%.

Movements for a flat tax are currently on hold in Poland and Germany, but remain active for a 15% flat tax in the Czech Republic and Croatia, and a 20% flat tax in Slovenia. There is strong support for a 20% flat tax among the younger members of the Flemish Liberal Democrats, the largest party in a coalition of seven political parties that governs Belgium under Prime Minister Guy Verhofstadt.

The Flat Tax Gathers Momentum in Western Europe

August 30, 2005

By Alvin Rabushka


Since 1994, the flat tax has become an integral part of the fiscal landscape in Central and Eastern Europe, from Estonia in the North, to Russia in the East, Georgia in the South, and Slovakia in the West. They are joined by Latvia, Ukraine, Serbia, and Romania. The number is likely to rise in the next year or two with Poland and the Czech Republic joining the bandwagon. Interest is also growing in Hungary and Croatia. Paint Central and Eastern Europe flat!

Suddenly, the flat tax is germinating in Western Europe, home to governments that generally profess the “social market economy” of high taxes and redistribution of income. Slow growth and unemployment seems to be changing minds. The flat tax is currently the centerpiece of tax policy debate in Germany, the United Kingdom, Greece, and Italy.

First, Germany. Angela Merkel, leader of the Christian Democratic Party and likely to become Germany’s new chancellor on September 18, announced the appointment of Professor Paul Kirchhof to her campaign team in late August. Kirchhof, who could become finance minister in the new German government, is known for his advocacy of a comprehensive 25% flat tax, which would replace the current system of three rates of personal income tax with a top marginal rate of 40%, and 25% on corporations. Kirchhof argues that a flat tax would help reverse Germany’s long period of low growth and high unemployment. This is not the first time that the flat tax has been advocated in Germany. Over a year ago, on July 27, 2004, a Finance Ministry twenty-nine member panel of academics, chaired by Professor Wolfgang Wiegard of Regensburg University, head of Germany's independent Council of Economic Advisers, proposed a 30% flat tax on all personal and corporate income.

Next, the United Kingdom. Gordon Brown, chancellor of the exchequer, recently came under fire for the Treasury’s cover-up of a report on the pros and cons of a flat tax. It blacked out segments of the report indicating the benefits of a flat tax, only releasing the sections describing its defects. A copy of the full report leaked to the media shows that a reduction in tax rates and burdens would stimulate further economic growth, and that the elimination of credits and exemptions would reduce avoidance and evasion. Leaders of the opposition Conservative and Liberal Democratic parties have appointed commissions to report this autumn to their parties on the desirability of a flat tax. Conservative shadow chancellor George Osborne visited Estonia earlier this year to observe its flat tax in operation and stated that the United Kingdom should consider its example.

Third, in mid-August, Greek media reported that the prime minister, Costas Karamanlis, and finance minister, Giorgios Alogoskoufis, are likely to announce at the Thessaloniki International Fair in early September a plan to introduce a 25% flat tax to replace the current system of three rates with a top rate of 40%.

In late August, debate broke out on the flat tax in Italy. Defense Minister Antonio Martino, formerly professor of monetary history and policy at the University of Rome and professor of economics (on Parliamentary leave) at LUISS University, indicated his support for a flat tax in an interview with the Bruno Leoni Institute. He was supported by the prime minister’s economic adviser, Renato Brunetta, also a professor of economics. Professor Martino is not a newcomer to the flat tax. In November 1981 he hosted a presentation I made on the flat tax to students at LUISS University. In 1985 he published an Italian pamphlet entitled “Simplificare L’Imposta Sul Reddito,” Una proposta di Robert E. Hall e Alvin Rabushka, which was a translation of the plan presented in the first book I co-authored with Robert E. Hall, Low Tax, Simple Tax, Flat Tax. Professor Martino wrote an introduction to the Italian pamphlet explaining how the Hall-Rabushka flat tax could be applied to Italy.

A complete roundup of Western Europe would include Denmark and Finland, where small political parties are expressing their interest in the flat tax, and Spain, where two professors who serve as economic advisors to the prime minister have written a paper supporting a flat tax for Spain. It’s too early to predict the adoption of the flat tax in any or all of these countries, but the idea has clearly taken root.

The Flat Tax May Spread to the Commonwealth of Puerto Rico (Only One Thousand Miles Southeast of Miami)

June 6, 2005

By Alvin Rabushka


On January 18, 2005, Anibal Acevedo Vilá was installed as governor of Puerto Rico. Puerto Rico, a Commonwealth in association with the United States, enjoys considerable autonomy in matters of taxation. Two weeks later, the governor established a Special Commission for Fiscal Reform (known as CERF by its Spanish acronym), instructing it to analyze Puerto Rico’s tax system and make recommendations for reform.

CERF delivered its report on April 30. It recommended a 10-10-10 comprehensive reform of Puerto Rico’s tax system.

1. A 10% flat tax on individuals, a marked reduction from the current top marginal 33% rate, which can reach 38% in certain conditions. Single taxpayers with annual income up to $15,000 would be exempt, as would married working couples with annual income up to $30,000. These levels would exempt 309,000 taxpayers from personal income tax, up from 180,000 under current law. Most of the newly-exempt would be taxpayers with annual income below $20,000. The 10% flat tax on individuals eliminates the taxation of poor persons.

CERF recommends that taxpayers be permitted to deduct mortgage-interest payments for their principle residence up to 30% of adjusted gross income. Additional deductions include contributions to retirement accounts, savings for dependents’ education, and charitable donations. Taxpayers with more than $150,000 in reported income would only be able to deduct mortgage interest up to 20% of adjusted gross income, adding an element of progressivity to the system. No deduction would be permitted for social security and unemployment taxes (as in the mainland U.S.). Taxpayers with income of $100,000 or less would receive a tax credit of $500 per family member.

Individuals would pay 10% on dividends received from corporations, a small double tax after corporations pay 10% on business profits.

CERF estimates that the 10% flat tax would collect $1.25 billion, a reduction below the $2.8 billion paid in personal income tax in 2004. Personal income tax would fall from 36% of total revenue to 12%.

2. A 10% flat tax on corporations. Only about 35,000 of the 140,000 registered corporations file tax returns. Local corporations are subject to a 39% tax rate, while companies operating under the Puerto Rico Industrial Incentive Act (PRIIA) pay 0% to 7% in taxes. The uniform 10% rate is designed to refine the strategy of the PRIIA. Companies paying the proposed 10% tax would be able to take it as a federal deduction when profits are repatriated to the U.S. mainland. The corporate tax reform would double revenue from $2.4 billion to $5.7 billion.

Companies would receive tax credits for employment creation, infrastructure improvement, productivity, continuing employee education, environmental protection measures, and efficient energy use, which would reduce their effective tax burden.

3. A 10% consumption tax, reduced to 9% after five years, which would replace a 6.6% general excise tax. The current excise tax cascades from importer to wholesaler to retailer, resulting in higher prices for consumers. The 10% consumption tax would be a hybrid VAT that could be implemented in less than a year. Exempt items would include prescription drugs, raw and intermediate manufacturing materials, educational products, and real estate services. Special excise taxes would remain on gasoline, alcoholic beverages, cars, and jewelry. To minimize the regressiveness of the consumption tax, a “Social Fairness Fund” would be established to compensate families based on their income and spending capabilities.

The 10% consumption tax is projected to raise $3 billion, which would be added to the $1.2 billion raised in special excise taxes.

Altogether, CERF estimates that the reforms would result in tax revenue of $12.5 billion. After returning $2.5 billion in corporate tax credits and compensation to low-income and poor residents through the Social Fairness Fund, $10 billion would remain—$2 billion more than the government collected in 2004. The additional revenue, which would be collected from upper-income households and corporations, would stem from closing loopholes, and reducing evasion and avoidance.

CERF’s report was printed only in Spanish. The English summary presented in the May 20, 2005, issue of Caribbean Business does not indicate how interest and capital gains would be taxed, and how corporations would depreciate investment.

A Competitive Flat Tax May Spread to Lithuania

March 24, 2005

By Alvin Rabushka


The flat tax revolution spreading through Central and Eastern Europe was launched in Estonia in 1994, with a rate of 26%. Estonia has since reduced the rate to 24% this year, with plans for 22% in 2006, and 20% in 2007. Since Estonia’s adoption of the flat tax, Latvia, Russia, Serbia, Ukraine, Slovakia, Romania, and Georgia have joined the movement. Details of each country’s flat tax have been chronicled in these Comments and Articles.

Thus far I have omitted Lithuania from this list. To be sure, Lithuania levies a 33% flat rate on wages and salaries. This rate is way too high to be competitive with other flat tax countries in the region. Apart from wages and salaries, Lithuania imposes a hodge-podge of rates on other sources of income: 20% on rent and self-employment income, 20% on salary from a foreign company in Lithuania, 29% on dividends, 20% on director’s fees. Corporation income is taxed at 15%, but agricultural products are exempted altogether. Companies with fewer than ten workers and turnover of less than Euro 144,810 are taxed at 13%. It is this multiplicity of rates, combined with the high 33% on wages and salaries, that has kept Lithuania off my list of flat tax countries.

All this may change in the near future. On March 24, 2005, United Press International reported that Lithuanian Prime Minister Algirdas Brazaukas stated his government’s intention to phase in a flat-rate income tax of 24% by 2008. He said “the move was being considered to bring Lithuania in line with other countries in Central and Eastern Europe that either have low flat tax rates or intend to implement them.”

Adoption of a 24% flat tax by Lithuania would make a clean sweep of the Baltics and increase the pressure on the remaining holdouts in the region to follow suit.

The Flat Tax May Spread to Poland Sooner than Expected

March 17, 2005

By Alvin Rabushka


For some time, the opposition Civic Platform party in Poland has proposed a 15% flat tax on individuals and corporations to replace the country’s current income tax system. Personal income tax in Poland is assessed at three rates: after a tax-free threshold of about PLN 37,000 (zlotys), (about $12,200 at the current exchange rate of PLN 3.03 = $1), a rate of 19% is levied on taxable income up to PLN 37,027, 30% on the next PLN 37,024, and 40% on all income exceeding PLN 74,040. The current corporate tax rate is 19%. Elections are scheduled to be held later this year, which would permit the Civic Platform, if it emerges victorious, to implement a 15% flat tax beginning January 1, 2006.

Perhaps the country will not have to wait for a new election for the flat tax. The Telegraph of the United Kingdom reported on March 16, 2005, that the ruling center-left Polish government plans to enact a flat tax, joining the flat-tax revolution spreading throughout Central and Eastern Europe. Poland’s minister of finance, Mirosaw Gronicki, is proposing an 18-18-18 solution: 18% flat rate on individuals, 18% on corporations, and 18% value-added tax (four percentage points less than the current standard 22% rate). The personal income tax will likely retain the current tax-free threshold.

The Civic Platform is likely to argue that its lower 15% rate would give Poland a competitive edge against Slovakia’s 19% rate and newly-enacted Romania’s 16% rate. Regardless of what rate is enacted, it’s clear Poland feels the pressure of its neighbors in the quest for investment and jobs.

Poland is the largest of the new European Union countries. Its adoption of the flat tax will increase the pressure on the remaining holdouts in the region—Belarus, Bulgaria, Croatia, Czech Republic, Hungary, Macedonia, Slovenia, Belarus, and Moldova—to respond quickly in kind, and Lithuania to get serious about slashing its high 33% rate on wages and salaries. It will certain get the attention of Germany and France, and, after that, who knows?

The Flat Tax at Work in Russia: Year Four, 2004

January 26, 2005

By Alvin Rabushka


On January 25, 2005, the Ministry of Taxation of the Russian Federation reported total taxes and revenues for the consolidated federal and regional budgets for 2004. The data show that the 13% flat tax on personal income continues to achieve very positive results.

In 2004, the ministry collected 574.1 billion rubles ($1 = R28) in personal income tax receipts, an increase of 26.1% over 2003. After adjusting for annualized consumer price inflation of 11.7% in 2004, real personal income tax revenue rose 14.4%. This growth builds on real ruble revenue increases of 25.2% in 2001, 24.6% in 2002, and 15.2% in 2003. For the four years, compound real ruble revenue increased 105.6%.

The 26.1% nominal growth in personal income tax receipts outpaced the overall 24.7% rise in total taxes and fees in 2004. As a share of total taxes and revenue, it rivals payments for use of natural resources, is more than double excises, and now stands at 76.6% of value added tax. The most dramatic change in 2004 is the 64.5% rise in nominal rubles, or 52.8% in real rubles, in corporate taxes. This is due to stepped up enforcement, exemplified in Yukos and other corporate cases, which has produced a new enthusiasm among corporate heads for compliance.

Consolidated tax receipts are divided between the federal and regional budgets. Personal income tax revenue is allocated entirely to regional budgets. It now supplies 31.9% of regional revenue, making regional governments the main beneficiaries of the 2000 personal income tax reform.

The Flat Tax Spreads to Georgia

January 3, 2005

By Alvin Rabushka


On December 22, 2004, by an overwhelming vote of 107 to 11, Georgia’s parliament adopted a new tax code. It slashed the size and weight of the code by about 95%. Key to the new legislation is the adoption of a 12% flat income tax. Effective January 1, 2005, it replaces the previous system which taxed personal income at four rates: 12% on income exceeding 200 Georgian laries, 15% between 201 and 350 laries, 17% between 351 and 600 laries, and 20% above 600 laries, with each individual receiving a monthly deduction of 9 laries per year. ($1 equals GEL 1.7784, an appreciation of 17.5% from GEL 2.156 in January 2004).

Adoption of the flat tax honors the pledge made by President Mikhail Saakashvili five days after his inauguration on January 25, 2004, when he stated that one of his new government’s top two economic priorities was to introduce a new flat-rate tax system.

The new tax code retains the former 20% profit tax rate, but cuts the rate on social insurance from 33% to 20% and VAT from 20% to 18%.

Dividends and interest payments will be taxed only once at 10% at the source of payment. Georgian enterprises and individuals that receive dividend and interest payments will not pay a second tax.

Adoption of the flat tax in Georgia extends the list of countries that have adopted the flat tax to seven. The chronology is Estonia (1994: 26% to be reduced to 20% in 2007); Latvia (1995: 25%), Russia (2000: 13%); Serbia (2003: 14%); Ukraine (2004: 13%); and, Slovakia (2004: 19%).

The choice of 12% was to insure the most competitive flat rate in Central and Eastern Europe.

The Flat Tax Spreads to Romania

January 3, 2005

By Alvin Rabushka

In an election held on December 13, 2004, Trajan Basecu, the mayor of Bucharest, won a surprise victory as president of Romania. His candidacy of the “Justice and Truth” coalition formed by the National-Liberal Party and the Democrat party was based, in part, on the introduction of a 16% flat tax on personal income and business profits. Following the election, the coalition was joined by the Humanistic Party and the Hungarian Democratic Union of Romania. Together the coalition controls 242 of the 469 seats in parliament, a clear majority. On December 26 Basecu named his 24-member cabinet headed by Calin Popescu Tariceanu as prime minister and 40-year-old economist Ionut Popescu as public finance minister. Parliament promptly approved the cabinet on December 28.

President Basecu emphasized his desire to make the 16% flat tax effective on January 1, 2005. Cabinet members took their oath of office early in the morning of December 29. The new prime minister, using a special ordinance, installed the flat tax of 16% on personal and business income to be enforced starting January 1, 2005. Had the cabinet and parliament waited until the new year to enact new tax legislation, the flat tax would not have taken effect until 2006.

The 16% flat tax replaces the former personal income tax, which imposed five rates: 18% on taxable income up to 28,000,000 Romanian Lei ($969.05), 23% on income between ROL 28,000,001 and 69,600,000 ($2,408.80), 28% between ROL 69,000,001 and 111,600,000 ($3,862.40), 34% between ROL 111,600,001and 156,000,00 ($5,399.05), and 40% over ROL 156,000,000. (US$1 = ROL 28,894) The 16% flat tax also reduces business profits tax from 25%. Further details on the new 16% flat tax will be posted to this site as they become available.

Romania’s decision to adopt a low flat tax reflects fiscal competition from other Central and Eastern European countries that have adopted the flat tax: Estonia, Latvia, Russia, Serbia, Ukraine, Slovakia, and Georgia. I have omitted Lithuania, which has a 33% flat rate on wage and salary income, from this list because its tax system imposes a wide variety of rates depending on source of income.

Other countries are waiting in the wings. The likelihood of a flat tax in these countries depends on the elections that will be held in the coming years. The shadow finance minister of the Czech Republic, Vlastimil Tlusty of the Civic Democratic Party, is urging his country to follow suit. His party has drawn up plans for an integrated 15% flat tax on corporations and individuals, a reduction from the current top rates of 29% and 31% respectively. The Civic Platform in Poland has also proposed a 15% flat tax on both personal and corporate income.

The Flat Tax at Work in Russia: Year Four, January-June 2004

July 19, 2004

By Alvin Rabushka


The Ministry of Taxation of the Russian Federation has reported the taxes and fees collected for the period January-June 2004. The data show that the 13% flat tax on personal income continues to achieve very positive results.

During January-June 2004, the Ministry of Taxation collected 252.4 billion rubles ($1 = R29.1) in personal income tax receipts, an increase of 27.7% over the comparable period in 2003. After adjusting for annualized inflation of about 11-12% in the first half of 2003, personal income tax revenue rose at an annualized real rate of about 16% in the first half of 2004 as against the same period in 2003. This growth builds on real ruble revenue increases of 25.2% in 2001, 24.6% in 2002, and 15.2% in 2003. If real ruble revenues rise at about 16% for all of 2004, total real receipts from the personal income tax will have more doubled over four years—despite a reduction in the top rate from 30% in 1999 to 13%. (See “The Flat Tax at Work in Russia: Year Three.”)

The 27.7% nominal growth in personal income tax receipts continues to outpace the overall rise in taxes and fees collected by the Ministry of Finance, which grew by a less robust 17.9% for January-June 2004 compared with the same period in 2003. The 13% flat tax on personal income has steadily grown in importance as source of revenue during the past three-and-a-half years.

(Angela and Diana Kniazeva, graduate students in the Department of Economics, Stern School of Business, New York University, kindly provided research assistance for the preparation of this article)

The Flat Tax in Iraq: Much Ado About Nothing—So Far

May 6, 2004

By Alvin Rabushka


Supporters and opponents of the flat tax have spilled considerable ink debating the merits of a 15% flat tax on personal income in Iraq that was implemented on January 1, 2004. Supporters of the idea believe that what’s good for the Coalition Provisional Authority (CPA) goose in Iraq is good enough for the U.S. Congressional gander. Opponents criticize the low 15% flat tax as a giveaway to the rich. Both groups, in the bard’s words, make “much ado about nothing,” at least so far.

It is instructive to examine the 2004 budget of the Republic of Iraq, which is posted on the CPA’s web site. Estimates in the draft October 2003 budget for calendar year 2004 projected oil revenue of New Iraqi Dinars (NID) 18,000 billion, or US$11.96 billion, constituting 93.5% of total revenue. (US$1=NID 1,505 in October 2003.) The share of revenue for 2005 and 2006 was projected at 96.4% and 97.7% respectively.

Other sources of revenue in 2004 include the reconstruction levy (NID 450 billion), the 15% personal income tax, or PIT (NID 15 billion), a 15% corporate income tax, or CIT (NID 30 billion), interest income (NID 15 billion), transfers from state-owned enterprises, or SOEs (NID 562.5 billion), user fees (NID 96.3 billion), and other taxes and charges (NID 90 billion). The reconstruction levy is a 5% charge on all goods, except humanitarian goods, imported into Iraq from January 1, 2004, to expire after two years.

The draft budget noted that the 15% PIT rate, a reduction from the previous top 75% rate, would encourage compliance and reward effort. The CIT rate of 15% applies to the profits of both domestic and foreign companies operating in Iraq. Transfers were projected for only a handful of the nearly two hundred state-owned enterprises. User fees and charges are to cover vehicle registration, emergency services, passport fees, higher education course fees, court fees, social security rental income, with flight overpass fees, entry fees to cultural institutions, consultancy fees, and sales of statistical publications added later. The remaining category of other taxes includes a 15% excise tax on alcohol and tobacco, a 10% tax on 4 and 5 star hotel accommodation and restaurants, a real estate transfer tax, and other smaller taxes including those collected by regional governments.

The 15% PIT was projected to rise from NID 15 billion in 2004 to NID 45 billion in 2005 and NID 90 billion in 2006. The share of total revenue to be contributed from the PIT is 0.078% in 2004, 0.16% in 2005, rising to 0.30% in 2005. The projected rise in the 15% CIT is from NID 30 billion to NID 75 billion and NID 150 billion over the same period, constituting 0.16%, 0.26%, and 0.30% respectively of total revenue.

Due to a marked improvement in fiscal circumstances over the original October 2003 budget, the Ministry of Finance issued revisions to the 2004 budget on April 10, 2004. It identified greater than expected net capital inflows of Iraqi Dinars (ID) 750 billion and additional revenue from all other sources of ID 2,470.3 billion. (US$1=ID 1,476 on April 10, 2004.) The first increase is due largely to a lower-than expected need for central bank reserves, which has reserves exceeding ID 2,250 billion. Given the appreciation of the Iraqi Dinar, no requirement for greater reserves is foreseen, permitting the cancellation of an ID 1,350 billion transfer from the budget to the Central Bank. Transfers of assets from abroad (ID 300 billion from Jordan) also added to the net figure, which was reduced by a shift of ID 900 billion in refunds from the oil-for-food program from 2004 to the 2003 budget.

The second increase of ID 2,470 billion is due largely to higher oil prices, generating an extra ID 3,262.9 billion. Partially offsetting higher oil revenues are a reduction of ID 277.5 billion in the reconstruction levy due to its late implementation, the postponement of the CIT for the year, a 50% cut in estimated PIT receipts of ID 7.5 billion, a reduction of ID 562.5 billion in transfers from SOEs, and reduced receipts from excise and land taxes. Anticipated receipts of ID 7.5 billion in PIT revenue will underwrite a mere 0.02% of projected expenditure of ID 29,889.8 billion in 2004 (which is higher by ID 9,756.3 billion than in the October 2003 draft budget due to a higher starting balance in uncommitted funds from the previous year).

Oil revenues in 2004 are estimated on the basis of a gradual fall in net oil price to US$21 (ID 31,000) a barrel in June 2004, assuming production of 1.9 million barrels per day by the end of the year. Higher prices and greater exports would generate a notable increase in net revenue. In early May 2004, the price of top quality crude oil reached about $40 a barrel with Iraqi oil exports exceeding April’s estimates. If prices for the year average well above $21 a barrel and exports exceed 1.9 million barrels a day, it is likely that PIT revenue will contribute in the neighborhood of 0.01% of total revenue.

It is a stretch, as many have done, to credit or criticize a 15% flat tax based on its negligible role for some time to come in generating revenue or stimulating economic activity. It remains to be seen if even ID 7.5 billion will be collected in 2004, or if any effort is made to enforce compliance. PIT revenue amounting to one or two-hundredths of one percent of total revenues is hardly a topic about which to crow or complain. Paul Krugman, please take note!

The Flat Tax at Work in Russia: Year Three

April 26, 2004

By Alvin Rabushka


On January 1, 2001, a 13% flat-rate tax on personal income took effect in Russia. (The general principles and beneficial economic effects of the flat tax appear in The Flat Tax.) Russia’s 13% flat tax replaced a three-bracket system, which imposed a top rate of 30% on taxable income exceeding $5,000. The flat tax has been remarkably successful by every conceivable measure, and has encouraged such other countries as Serbia (2003), Ukraine (2004), and Slovakia (2004) to implement flat taxes of their own. Political parties in Poland, the Czech Republic, and Georgia have announced their support for the flat tax and there is interest in Bulgaria and Romania. Even China has taken the step of translating The Flat Tax into Chinese for consideration by the Ministry of Finance.

Let’s review Russia’s 13% flat tax since its implementation on January 1, 2001. In 2001, personal income tax (PIT) revenue totaled R255.5 billion, an increase of 46.7% in nominal rubles, or 25.2% in real rubles after adjusting for inflation of 21.5%. PIT revenue as a share of consolidated budget tax revenue rose from 12.1% in 2000 to 12.7% in 2001. Since economic growth of 5.1% in 2001 was lower than the post-Soviet record 10.0% growth in 2000, the rise in revenue cannot be attributed solely, or even largely, to growth in 2001. (For a detailed treatment of Russia’s 13% flat tax, see “The Flat Tax at Work in Russia.”)

In 2002, PIT revenue amounted to R357.1 billion, an increase of 39.7% over 2001. After adjusting for inflation of 15.1%, real revenue rose 24.6%, supplying 15.3% of the consolidated budget. GDP growth in 2002 was 4.7%, a small decline over 2001. (See “The Flat Tax at Work in Russia: Year Two.)

In 2003, PIT revenue generated R449.8 billion, a nominal gain of 27.2% over 2002. After adjusting for inflation of 12.0%, real revenue increased 15.2%, supplying 17% of consolidated budget revenue. GDP growth in 2003 was a more robust 7.3%. Only corporate income tax and value added tax generated more revenue than the PIT.

The composition of PIT revenue in 2003 was as follows: taxes assessed on income at the 13% rate generated 96.9% of all PIT revenue; taxes on dividends, assessed at a higher 30% rate, 1.9%; and taxes on non-residents and individual entrepreneurs, 0.9%.

In the three years since the top rate of PIT was reduced from 30% to 13%, real flat tax revenue has risen by 79.7%. Russia’s budget is relatively healthy. Tax compliance has improved. And incentives to work, save, and invest remain strong.


(Anjela and Diana Kniazeva, graduate students in the Department of Economics, Stern School of Business, New York University, provided research assistance for the preparation of this article.)

The Flat Tax Might Spread to Georgia

February 3, 2004

By Alvin Rabushka


Georgia’s new president, Mikhail Saakashvili, was inaugurated on January 25, 2004. Five days later, speaking before the anti-corruption group Transparency International in Berlin, he stated his new government’s top two economic priorities. The first is to introduce a new flat-rate tax system. The second is to create incentives for foreign investors.

Saakashvilli noted in his remarks that Georgia had far more tax officials than his small country needed. He wants to reduce the scope and size of the tax collection apparatus and reduce the disincentives of the current tax system.

The current system of personal income taxation is based on the Georgian Taxation Code of 1997. Personal income is taxed at four rates: 12% on income exceeding 200 Georgian laries, 15% between 201 and 350 laries, 17% between 351 and 600 laries, and 20% above 600 laries. Each individual receives a monthly deduction of 9 laries per year. ($1 equals GEL 2.156) The president did not indicate any specific flat rate in his address. If Georgia’s neighbors of Russia and Ukraine are a model, the rate could be set as low as 13%.

Adoption of a flat tax in Georgia would add one more country to a growing list that has adopted a flat tax. The chronology is Estonia (implemented in 1994), Latvia (1995), Russia (2001), Ukraine (2004), and Slovakia (2004).

The Flat Tax Spreads to Serbia

March 23, 2004

By Alvin Rabushka


On January 1, 2003, the government of Serbia implemented a comprehensive 14% flat-tax reform. Enacted in November 2002, it replaced the previous three-rate, graduated personal income tax system that had been enacted and revised between 1994 and 2001. Assessed on individual employees or self-employed persons, the previous system imposed a rate of 10% on taxable income up to Serbian Dinars (CSD) 60,000, 15% on taxable income between CSD 60,000 and CSD 120,000, and 20% on taxable income exceeding CSD 120,000. The tax rate on investment income was assessed at the highest rate of 20%. (As of March 22, 2004, US$1 = CSD 55.56)

The new system imposes a flat rate of 14% on labor income, and income from agriculture, forestry, and self-employment, previously taxed at 20%. Withholding tax on salaries is set at 14%. The new law includes an allowance for adults and children, retirement contributions up to twice the average monthly salary paid per employee in Serbia, and redundancy payments determined by the labor law of the Republic of Serbia.

Additional tax on income above CSD 600,000 ($10,799) was reduced from 20% to 10%, which makes for a combined maximum rate of 24%. This exception to an otherwise uniform flat tax affects a very small percentage of the population.

The new laws also reduced the corporate profit tax rate from 20% to 14%, giving Serbia the lowest corporate profit tax rate in Europe. This eliminates any interest in choosing to incorporate for tax benefits since the personal and corporate tax rates are the same. In addition to a reduction in the corporate tax rate, for the five years beginning January 1, 2003, large investments in underdeveloped areas exceeding CSD 600 million and employing more than 100 workers will receive an exemption on corporate income tax for ten years.

The government has stated its intention to further reduce taxes on income in the near future, with the reduction to be made up by a lottery tax.

It should be noted that Serbia preceded Slovakia’s implementation of a 19% flat tax and Ukraine’s 13% flat tax by a full year.

The Flat Tax Spreads to Slovakia

November 3, 2003

By Alvin Rabushka


On October 28, 2003, Slovakia’s parliament enacted a 19% flat tax on both individual and corporate income to take effect on January 1, 2004. The measure passed by a vote of 85 to 48, with five abstentions, and garnered the support of some opposition deputies. The 19% flat tax on individual income replaces five brackets of 10, 20, 25, 35, and 38%. The flat tax greatly simplifies the current individual income tax which includes 90 exceptions, 19 sources of income that are not taxed, 66 items that are tax exempt, and 27 items with their own specific tax rates (e.g, bank interest, honoraria, etc.). The 19% tax rate on corporate income replaces the current rate of 25%. Once the corporate tax is paid, there will no tax on dividends received by individuals.

The 19% flat tax on individuals includes a personal exemption of Slovak Crowns or Koruna (SKK) 80,832, about $2,300, which is equivalent to six times average month salary. This is a rise from the current level of SKK 38,760, about $1,100 or 2.9 times average monthly salary. Under current law, gross income up to SKK 90,000 is taxed at a rate of 10%. The 20% tax bracket takes effect on income between SKK 90,000 and 180,000. Raising the exemption to SKK 80,832 virtually eliminates the increase in income tax due to the elimination of the 10% tax bracket. Each year, the exemption will be increased to equal 19.2 times the minimum monthly living standard, amounting to SKK 4,210 ($120) in 2004.

Along with the flat-rate income tax, a 19% VAT will take effective on January 1, 2004.

Slovakia adds one more country to a growing list that has adopted a flat tax. The chronology is Estonia (implemented in 1994), Latvia (1995), Russia (2001), Ukraine (2004), and now Slovakia (2004).

The Flat Tax at Work in Russia: Year Three, January-June 2003

August 13, 2003

By Alvin Rabushka


The Ministry of Taxation of the Russian Federation has reported the taxes and fees collected for the period January-June 2003. The data show that the 13% flat tax on personal income continues to achieve very positive results.

During January-June 2003, the Ministry of Taxation collected 197.6 billion rubles in personal income tax receipts, an increase of 31.6% over the comparable period in 2002. Inflation during the first half of 2003 was 7.9%. Assuming annual inflation of about 15% for all of 2003, personal income tax revenue rose at an annualized real rate of 16.6% in the first half of 2003 as against the same period in 2002. This growth builds on real revenue increases of 28% in 2001 and 20.7% in 2002.

The 32.6% nominal growth in personal income tax receipts continues to outpace the overall rise in taxes and fees collected by the Ministry of Finance, which grew by a less robust 17.5% for January-June 2003 compared with the same period in 2002. In percentage terms, personal income tax receipts grew more rapidly than both corporate profit tax and VAT. The 13% flat tax on personal income has steadily grown in importance as source of revenue during the past two-and-a-half years.

The Flat Tax Spreads to Ukraine

May 27, 2003

By Alvin Rabushka


On May 22, 2003, Ukraine’s parliament, taking a page from Russia’s playbook, overwhelmingly voted into law a 13% flat tax on personal income to take effect on January 1, 2004. (See “The Flat Tax at Work in Russia”) The 13% flat tax replaces five brackets of 10, 15, 20, 30, and 40%. Dividends and interest on bank deposits will be taxed at a lower 5% rate beginning January 1, 2005. Following further in Russia’s footsteps, the tax rate on company profits was previously reduced, from 30% to 25% (see “Further Extending Russia’s Tax Reforms”). Ukraine’s finance minister is also seeking a reduction in VAT, from 20% to 15%.

News reports suggest that Ukraine officials consulted with their Russian colleagues. The advice they received was that incentives and revenue would rise and the underground economy and tax evasion would decline (see “The Flat Tax at Work in Russia: Year Two”).

Ukraine adds one more country to a growing list that have adopted a flat tax. The chronology is Estonia (implemented in 1994), Latvia (1995), Russia (2001), and now Ukraine (2004). Belarus intends to harmonize its tax code with Russia. A bill for a 20% flat tax (perhaps as low as 15%) on personal income is before Slovakia’s parliament in May 2003.

The opposition ODS - Civic Democratic Party in the Czech Republic has drawn up plans for a 15% flat tax on personal income, which has a top rate of 31%, and a 15% flat tax on corporations, down from 29%.

A planned May 2003 visit on my part to Beijing to discuss the flat tax with officials in the Ministry of Finance was postponed due to the SARS outbreak. A Chinese translation of The Flat Tax has been published by the China Financial & Economic Publishing House in May 2003. Chinese professors of public finance have written articles on the benefits of sharply reducing China’s top personal income tax rate of 45% to no more than 20%.

The Flat Tax at Work in Russia: Year Two

February 18, 2003

By Alvin Rabushka


On January 1, 2001, a 13% flat-rate tax on personal income took effect in Russia. (On the general principles and beneficial economic effects of the flat tax, see The Flat Tax.) Russia’s 13% flat tax replaced a three-bracket system, which imposed a top rate of 30% on taxable income exceeding $5,000.

During its first year, the 13% flat tax exceeded all expectations. In 2001, personal income taxes increased 46% in nominal rubles, or 28% in real rubles after adjusting for ruble inflation of 18%. Personal income tax as a share of consolidated budget tax revenue rose from 12.1% in 2000 to 12.7% in 2001. Since economic growth of 5.0% in 2001 was lower than the record 9.0% growth in 2000, the rise in revenue cannot be attributed solely, or even largely, to growth in 2001. For a detailed treatment of Russia’s 13% flat tax, see “The Flat Tax at Work in Russia.”

Data for 2002 are now available, posted to the Russian government’s Ministry of Finance web site. (Http://www.nalog.ru) Personal income taxes in 2002 amounted to R357.1 billion ($1=R31.7), up from R255.5 billion in 2001, an increase of 39.8%. Annualized average ruble inflation in 2002 was 15.8%. Thus, real ruble tax revenues rose 20.7%, another large increase. Moreover, economic growth of 4.3% in 2002 was lower than the 5.0% growth the previous year. Real ruble revenues continued to rise in 2002 despite slowing growth, suggesting greater compliance and efficiency in tax administration.

Since the implementation of Russia’s flat tax, personal income taxes have contributed a growing share of Russia’s consolidated budget. In 2002, the flat tax generated 15.3% of total tax revenue, up from 12.7% in 2001. From relative unimportance as a source of revenue a few short years ago, the 13% flat tax on personal income now exceeds excise taxes and taxes on natural resource use, and is fast catching up with corporate income tax and value added tax.

To date, the governments of Estonia, Latvia, and Russia have enacted flat-rate taxes on personal income. Russia has also implemented a reduction in the corporate rate of tax, from 35% to 24%, effective January 1, 2002. Russia has also enacted a flat-rate small business tax, the lesser of 6% of gross turnover or 15% of profits. (See “Further Extending Russia’s Tax Reforms,” “Tax Reform Remains High on Russia’s Policy Agenda,” and “Completing Small Business Tax Reform”) A Chinese edition of The Flat Tax is scheduled for publication by China’s Ministry of Finance in early 2003.

(Anjela and Diana Kniazeva, graduate students in the Department of Economics, Stern School of Business, New York University, provided research assistance for the preparation of this article.)

Completing Small Business Tax Reform

July 3, 2002

By Alvin Rabushka


On July 2, 2002, the Duma, the lower house of the Russian Parliament, concluded its business prior to the start of its summer vacation. Among the bills approved was a comprehensive reform of small business taxation. Once the measure is approved by the Federation Council, the upper house of Parliament, and signed by President Putin, the measure becomes law.

On May 22, 2002, I posted to this site an article entitled “Tax Reform Remains High on Russia’s Policy Agenda.” It described the government’s proposal. Small firms with fewer than 20 staff and turnover under R15 million ($477,100 at current exchange rates) could choose to remit the lesser of a 15% flat tax on profits or a 6% flat tax on turnover. Eligible businesses would enjoy exemption from value-added tax, sales tax, property tax, and social insurance taxes.

The measure approved by the Duma on July 2 retained the previous provisions on tax rates and turnover, but extended the number of employees in any eligible small business to 100. The benefits of qualifying as a small business are readily apparent since larger corporations are subject to a 24% profits tax.

We have commented on this site on all of Russia’s major tax reforms, especially the 13% flat tax on personal income (see “The Flat Tax at Work in Russia” and The Flat Tax). The personal income tax has been especially productive of revenue, with ruble receipts up 28% in real terms in 2001 compared with 2000.

On July 1, 2001, the senior deputy minister of finance reported that underpaid taxes to the federal budget in the first half of 2002 amounted to R 17 billion ($540.17 million). He acknowledged that collection of tax on the extraction of natural resources, income tax for individuals, and the unified social tax was satisfactory, but that the collection of value-added taxes and profits taxes was below projections. (See www.rbcnews.com/free/20020701140045.shtm) The reasons for the new small business tax are to improve incentives and compliance among these firms. With exemptions from value-added tax, sales tax, property tax, and social insurance taxes, small businesses will receive a substantial reduction in their tax burdens. Banking, insurance, and investment businesses are excluded from the small business tax reform.

Where can Russian tax reform go from here?

Additional simplification can be achieved by reducing the small business profits flat tax rate to 13%, which would eliminate the unnecessary distinction between sole proprietors and small businesses.

A more drastic measure would reduce the corporate income tax rate from 24% to 13%, thereby permitting full integration with the personal and small business taxes. This would enable all taxpaying entities to be treated equally in terms of the choice of legal ownership.

If it were necessary to maintain revenue neutrality, the government could raise the value-added tax by a few percentage points, or impose a higher natural resource extraction tax.

Recent rate reductions and simplifications have transformed a complex, high-rate tax system into a simpler, low-rate system. A few additional measures could complete the process of tax reform.