Back during the Cold War, who would ever have imagined that American taxpayers might someday envy their counterparts in the Soviet bloc? Yet it was not President Bush but Russia’s own Vladimir Putin who followed the lead of “Balkan Tigers” Estonia, Latvia and Lithuania and implemented a flat tax in his formerly communist country in 2001.
How has a flat tax worked in nations where cumbersome bureaucracies and unworkable Five-Year Plans once inspired worldwide ridicule?
Swimmingly, according to Daniel Mitchell of the Cato Institute, who notes that the 17 nations that have adopted flat-tax systems “generally have experienced very positive outcomes” — including more economic growth, less unemployment and higher tax compliance. Iceland, Mongolia, Kyrgyzstan and Macedonia all joined the flat-tax bandwagon this year, and Montenegro is due to hop aboard this month.
In fact, a flat-tax rate has done so well in all the countries in which it’s been adopted, Mitchell said, that they are now competing with each other to get the rates down even lower.
But U.S. taxpayers are still stuck with a complicated, phone-book-size tax code that’s biased against saving and investment, therefore ensuring less accumulation of the capital needed to finance economic growth and create new jobs. A flat tax proposed here in the 1990s by former Texas Congressman Dick Armey would have allowed families to file their tax returns on a single postcard, with the first $30,000 exempt from a 17 percent across-the-board tax on wages, salaries and pensions. The plan would have eliminated all the loopholes and exemptions that make tax lawyers rich.
The flat-tax revolution in Russia and elsewhere should be of major concern to Americans worried about losing jobs to outsourcing. The global flow of labor and capital will continue to reward countries that keep tax rates and government regulation low.
Mitchell points out that the Paris-based Organization for Economic Cooperation and Development created a blacklist in 2000, threatening economic reprisals against low-tax countries that encouraged the flight of capital from high-tax nations. But with 12 countries going flat tax since then — five this year alone — the OECD’s bully tactics clearly haven’t succeeded.
Here in the States, tax complexity will drain $1 trillion from our economy over the next seven years as time and money is wasted complying with a byzantine tax code that gets harder and harder to decipher every year. American taxpayers would surely prefer to file their returns on a postcard instead.