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.