Flat Tax Update, October 2009

After a relatively quiet year, the flat tax is showing new life.

Prime Minister Najib Razak of Malaysia introduced his government’s 2010 budget on October 27, 2009. The budget contained modest reductions in public expenditure and taxation, but also included a special provision to promote selected important industries for Malaysia’s economic development. Both foreign and Malaysian employees will be taxed at a flat rate of 15 percent if they work in the fields of green technology, biotechnology, educational and healthcare services, financial advisory and consultancy, logistics, and tourism. The idea is to provide a more attractive workplace for these activities in Malaysia than Singapore, which taxes personal income up to a higher 20 percent rate.

In November, Zimbabwe’s finance minister will announce his country’s new budget for 2010. The Zimbabwe Telegraph reported that his budget is likely to include a flat tax regime.

International aid agencies have been pressuring the Baltic countries to abandon their flat taxes as the price of financial assistance to assist them through the global financial crisis. Latvia and Lithuania have been the two principal targets of these efforts. Thus far, both have successfully resisted abandoning their flat taxes in exchange for financial aid. They have agreed to cut spending and adopt other austerity measures, but not to replace the flat tax with graduated tax rates.

The Saskatchewan office of the Frontier Center for Public Policy (with offices also in Manitoba and Alberta) released Policy Studies No. 68 in September 2009 by David Seymour entitled "Five Single Rate Tax Thoughts." This study is likely to influence tax policy after the next Saskatchewan provincial election

Interest in the flat tax has begun to appear in the media in Moldova, Uganda, and Aruba.

Britain Experiments With a Flat Tax

Desperate for revenue to plug gaping deficits in their public finances, the Western democracies are waging an all-out assault on tax havens around the world. On August 12, 2009, Liechtenstein capitulated to British demands that its private banks will no longer hold secret British accounts that enable Britons to evade British taxes. It is estimated that there are 5,000 British accounts holding about $5 billion in secret accounts. Between 2010 and 2015, British investors holding funds in these accounts will be given preferential terms of a 10 percent penalty on evaded tax, plus repayment of evaded tax, if they voluntarily declare their tax arrears to Her Majesty’s Revenue and Customs.

Those who come forth voluntarily will also be given the option of paying a 40 percent flat tax on all outstanding tax claims. Although an ostensibly high rate, the 40 percent flat tax replaces all other British taxes due including national insurance, inheritance, income, and value added taxes.

Those who do not comply will be required to move their funds out of Liechtenstein by 2015 and their names will not be provided to British tax authorities. However, if caught, the penalty will be 100 percent, and it is most likely that all such individuals, companies, trusts, and other structures will remain under Her Majesty’s Revenue and Customs microscope for years to come.

It seems logical that Britain will work out a similar arrangement with Switzerland and other tax havens around the world. One might hope that this flat tax experiment will be so successful that Parliament will give serious thought to replacing all its taxes with a simple, but lower than 40 percent, flat tax.

Other Flat Tax News

From October 1, 2009, Romania will no longer tax reinvested profits. This change will make the country’s 10 percent flat tax on corporate and personal income even more attractive to investors.

In summer 2009, Rwanda tendered for a consultancy firm to conduct a study into the adoption of a flat tax. Uganda is watching the results of this exercise.

Following the landslide election victory of Ricardo Martinelli as president of Panama in June 2009, the new minister of economy and finance announced in early July the government’s plan to implement tax reforms as Martinelli promised during the campaign. One phase is the application of a flat tax.

Latvia and Lithuania have thus far resisted pressure from the International Monetary fund and internal political groups to replace their flat taxes graduated rates.

In May 2009, Moldova’s acting president Vladimir Voronin proposed that the government should examine the introduction of a 15 percent flat tax on individuals to raise the competitiveness of Moldova’s economy to that of neighboring flat-tax countries.

In Canada, Alberta is the only province with a flat-rate provincial income tax, assessed at 11 percent. Its success has prompted neighboring Saskatchewan to consider a 10 percent flat tax to stop leakage of economic activity to Alberta. The maritime province of New Brunswick is also considering a flat tax.

In September the Swiss Canton Thurgau will hold a referendum on the flat tax. If it passes, which appears likely, Thurgau will increase the number of flat-tax cantons to three.

Flat Tax Progress in January-February 2009

Panama

2009 is getting off to an auspicious start. Ricardo Martinelli, the head of Panama’s leading opposition party plans to implement a flat tax if he is elected president in the upcoming May 3, 2009, election. His party has stated it wants to cut the top 27% tax rate on individuals to a flat rate of 15%, or perhaps an even lower 10%. In exchange for broadening the tax base by eliminating incentives for specific sectors, the current statutory 30% corporate tax rate could also be cut to 15% or 10%.

In January 2009 Martinelli joined forces with Juan Carlos Varela and the Panameñista Party; Varela is running as Martinelli’s vice-presidential candidate. Balbina Herrera, their opponent in the ruling Revolutionary Democrat Party, opposes the flat tax on the grounds that it would eliminate the country’s multiple-rate progressive system. Polling data in February 2009 show Martinelli with 53% support, up from 44.3% in January.

United Kingdom

In late January 2009, Conservative Party leader David Cameron spoke about his vision for the United Kingdom at Demos (a Blairite think tank). If the Conservatives win the next national election that must be held by 2010, Cameron will become prime minister. During the question and answer period, he stated that flat rates of tax are more progressive than graduated rates, basing his belief on the experience of those Central and Eastern European countries which adopted the flat tax in the past 15 years. Apart from their gains in revenue and improved economic conditions which accompanied the switch to the flat tax, its enactment in Britain would also eliminate all the hassles to businesses and individuals due to excessively complicated tax laws.

Oklahoma

On February 17, 2009, by a 9-6 vote, Oklahoma’s Senate Finance Committee passed a flat tax bill that would set the rate at 3.423% for all income brackets. If enacted, it would replace the current graduated rate system that taxes income over $10,000 at 7%. In exchange for the lower flat rate, the bill would broaden the tax base by reducing several deductions.

A Bold Fresh Flat Tax Proposal for New Zealand

On February 10, 2009, former finance minister and current finance spokesman for the ACT political party in New Zealand, Sir Roger Douglas, introduced a bold fresh flat tax plan. Sir Roger is a former Labor Party member known for his free-market, low-tax “Rogernomics” policies during the 1980s. Speaking to the Rotary Club of Orewa, he termed his plan a means to achieve a low-tax welfare state by redesigning the tax system in concert with the social welfare system.

Seven political parties occupy 122 seats in New Zealand’s Parliament. ACT holds 5. Along with 5 from the Maori Party, ACT has a confidence arrangement with the current government-led National Party of 58 seats, giving the latter a coalition majority of 68 seats.

Under Sir Roger’s plan, individuals would have the choice to continue to pay taxes and receive benefits in accordance with New Zealand’s current tax system and monopoly-run health, welfare, and retirement services. Or, they could opt in to a new system that works as follows.

An individual’s first NZ$30,000 would be tax free. Above that tax-free threshold, individuals would pay a flat-rate tax, to be reduced over the next 15 years along with the corporate tax, to 15%. The tax-free threshold would be increased to keep pace with inflation, and the threshold would rise with the number of children. Those earning below the threshold would receive a tax credit (cash) to boost their income up to the threshold.

The current personal income tax consists of five rates, 13.9% on the first NZ$14,000 of taxable income, 22.4% between NZ$14,000-40,000, 34.4% between NZ$40,000-70,000, 40.4% above NZ$70,000, and 46.4% for those who fail to complete a declaration form. These rates include a charge of 1.4%, an earners’ levy rate, to cover non-work related injuries. Self-employed individuals are subject to the same rate as employees. Companies pay a standard 30% profits tax. The goods and services tax, a value-added tax, would continue at 12.5%, along with excises on alcoholic beverages, tobacco products, and fuel.

In return for being taxed at a low flat rate, individuals will be required to contribute to a dedicated retirement plan in their own names. For health care, individuals and families will be required to purchase catastrophic health insurance, and risk coverage against injury, sickness, or job loss. The purposes of the plan are to improve incentives to work, save, and invest, while reducing dependence on the government for social services.

The Flat Tax at Work in Albania: Year One

Beginning January 1, 2008, Albania implemented a 10% flat tax on corporate and personal income. The 10% personal rate replaced five rates that peaked at 30% while the 10% corporate rate was halved from the previous 20% rate. Despite the reduction in rates, total revenues increased from LEK 125 billion in 2007 to LEK 148 billion in 2008, an increase of 18.4%. ($1.00 = LEK 96.71). With inflation a modest 3% in 2008, real inflated-adjusted revenue rose 15.2%.

One other development in the flat tax world is worth noting. On January 1, 2009, Latvia’s personal income tax rate fell from 25% to 23%.