2008 Flat Tax Wrap-Up

A flat tax on individuals (households) and, in some instances, the same flat-rate on individuals and corporations, has spread throughout most of Central and Eastern Europe. The remaining holdouts in alphabetical order, along with their tax-rate schedules, are as follows:

Croatia: 15, 25, 35, 45%
Hungary: 18, 36, 40%
Kosovo: 5, 10, 20%
Moldova: 7, 10, 22%
Poland: 19, 30, 40%
Republika Srpska (Serb-ruled portion of Bosnia and Herzegovina): 10, 15%
Slovenia: 16, 27, 41%

Croatia and Slovenia have steadfastly resisted any movement to a flat tax. Croatia has stuck to a tax-incentive approach for particular investments in specified locations. Slovenia regards itself as a member country of Western Europe, which requires that it maintain a schedule of steeply-graduated rates.

Serious movement towards a flat tax has yet to occur in Hungary and Moldova.

In Poland the governing coalition under the leadership of Prime Minister Donald Tusk favors a flat tax, but the leading opposition party holds the office of president with the power to veto legislation. If and when Tusk’s party wins control of both parliament and the presidency, Poland will be poised to adopt a 19% flat tax on individuals to complement its 19% corporate tax.

Kosovo is a brand-new Muslim country with a large concentration of Catholic Serbs in the upper 10% of the country bordering Serbia. Its immediate neighbor on its southwest border, Muslim Albania, adopted a flat tax in mid-2007. In this regard, the prospects for Kosovo following suit in the near future appear promising.

Republika Srpska has only to eliminate its 15% rate to attain parity with the 10% flat tax adopted in the Federation of Bosnia and Herzegovina in 2008.


Other Flat Tax Potpourri

The province of New Brunswick in Eastern Canada has been debating the merits of a flat tax for several months. A bi-party committee concluded its examination of the tax issue in mid-November 2008. The committee’s recommendation was for a provincial flat tax of 10% to rival that of Alberta. In addition, it was suggested that the corporate rate be cut from 13% to 5%. Any lost revenue is to be made up from a rise in the harmonized sales tax from 13% to 15%.

In late November, Dutch Minister of Finance Wouter Bos stated that he was not opposed to a flat tax of 37% that would replace the current four-bracket set of rates that peaks at 52%.

Expatriates in Korea can choose the lower of two personal income tax calculations. One imposes a 17% flat tax that excludes deductions and credits. The other treats 70% of gross income as taxable, exempting 30% from formal earned income and then allows for certain deductions and credits. Domestic Korean employees are subject to a four-bracket schedule with a top rate of 34% in 2009.

The Swiss Canton of Thurgau is poised to vote on a cantonal flat tax in September 2009. The odds are favorable that it will become the third Swiss Canton to replace graduated income taxes with a flat tax.

Why the U.S. Federal Income tax is so Hard to Reform

Since President Reagan’s 1986 tax legislation, which broadened the tax base and lowered tax rates, every subsequent proposal to reform the federal income tax has come to naught. Indeed, the length and complexity of the code continue to grow topsy. Every group that benefits from a new provision becomes another political constituency for keeping and expanding it.

Several proposals for heath care reform, if enacted, would create another large interest group that will hamper future efforts at tax reform. Under current law, employer-provided health insurance to employees is not subject to individual taxation, whereas those who buy insurance on their own must pay for it out of after-tax income. One proposal suggests leveling the playing field by eliminating the exemption for employer-provided insurance, but its authors argue that eliminating that benefit would face enormous political opposition. Accordingly, they recommend that individual purchasers of insurance receive a tax deduction. On its face, this seems fair, and would likely extend coverage to some currently uninsured. The problem is that this new tax benefit, like so many before it, would further make the federal income tax impervious to comprehensive reform.

The same applies to special tax benefits for education, energy, green technology, housing, and so on. Why is that some, but not other, endeavors are to be encouraged and rewarded with tax benefits? Why not give the entire economy the benefit of lower rates?

The way to reform the tax code is to broaden the base and lower the rates (preferably to a low flat rate). Advocating new deductions and/or credits only makes it more difficult.

The Flat Tax Spreads to the Federation of Bosnia and Herzegovina (FBiH) within Bosnia and Herzegovina (BiH)

By Alvin Rabushka


The Dayton Agreement of 1995 ended the war between Serbs, Muslims, and Croats in what was the former Yugoslav territory of Bosnia and Herzegovina (BiH). Two separate entities were initially established within BiH: the Federation of Bosnia and Herzegovina (FBih), also known as the Bosniak-Croat entity, and Republika Srpska (RS). A third entity was subsequently established, the Brčko District (BD), which is a small community of about 80,000 inhabitants, of whom 40% are Bosniaks (Muslims), 49% Bosnian Serbs, and 11% Bosnian Croats. (According to the Dayton Peace Accords, an arbitration process could only determine the disputed portion of the Inter-Entity Boundary Line.) Brčko continues to be a disputed, multi-ethnic town, subject to its own laws and those of FbiH.

Separate tax systems were established in each of the three entities. The BD assembly passed a new law on income tax in the middle of 2003, to take effect at the beginning of 2004. The law eliminated double taxation of interest and dividends, exempted capital gains, and imposed a uniform 10% flat tax on salaries, incomes, and profit of corporations. Each employee receives a personal allowance of BAM 240 and an additional BAM 120 for each dependent per month. ($1 = BAM 1.47 as of December 11, 2008. BAM stands for Convertible Marka.)

The FBiH encompasses 11 Cantons, including Sarajevo. In the second week of 2008, the FBiH House of Representatives adopted a new income tax to take effect on January 1, 2009. The House abandoned the initial idea of a two-rate system of 10% and 15% in favor of a flat rate of 10%. The new law replaces a cantonal based income tax that ranged between 5-30% depending on cantonal regulations and different types of income. A personal allowance exempts the first BAM 3,600 a year from income tax. Additional fractional allowances are permitted for a dependent spouse, dependent children, other dependent immediate family members, and for disability of immediate family members. Dividends, prizes, pensions, and child allowances are exempt.

The income tax in Serb-dominated RS imposes two rates: 10% between taxable income BAM 2,460-25,008 and 15% on taxable income above that.

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.