FLAT TAX – IT WORKS! Freedom of people is connected with fair taxes. Progressive income tax system used in most countries of the World today is not fair. The idea behind such system is simple: the more you earn, the more you have to pay in taxes. Such of attitude however brings down the motivation of the people to work more and plan for their own future. It makes them rely more heavily on the public welfare system. Although this is known all over the world there are not many countries which have been able to take any real steps towards re-introduction of proportional income tax as progressive income tax was actually first introduced only in the 19th century. (Charles Adams. For good and evil. The impact on taxes on the course of civilization. Madison Books. 2001) In modern times Milton Friedman has advocated for flat rate proportional income tax, but long time only country really introduced it was Hongkong, which in 1947 introduced proportional 15% personal income tax. This has been highly succesful and supported Hongkongs fast development. (Alvin Rabyshka. Hong Kong. A Study in Economic Freedom. Chicago 1979) After the collapse of Soviet Union nations in Central and Eastern Europe had to find ways to get out of post-communist chaos and build up modern societies and economies. Some of them tried to move immediately to the Western Welfare State and failed. Others tried to learn from German economic “miracle” after II World War and other similar “miracles” and introduced radical market orientated reforms. Among the last was small country called Estonia. In 08.12.1993 Estonian ruling coalition overcoming massive protests from “economic experts” (look on those protests in Transforming the Estonian economy. Tallinn 1995) and left-wing populist parties pressed through in Estonian Parliament reform of personal income tax on flat 26% level. (Mart Laar. Litlle country that could. CRCE 2002, p. 274-275) Impacts of reform were very positive. After decrease of the level of taxation budget revenues did not fall but increased significially (source: Estonia: tax Reform in the Approach to EU. Worldbank. April: 2001.). Estonian state revenues (in millions of EEK 1993 8603 1994 12466 1995 16467 1996 20431 Very fast was growth in the personal income tax where revenues actually doubled with two years Revenues from personal income tax (in millions of EEK) 1993 1832 1994 2388 1995 3593 1996 4352 Intoduction of flat rate proportional income tax helped to boost economic activity and create new working places, helping Estonia to avoid massive unemployment. (Mart Laar. Little country that could. CRCE London 2002, p. 272-276) Success of Estonian tax reform encouraged Estonian neighbours to follow its example. In 1995 Latvia introduced flat rate personal income tax on 25% and in 1996 Lithuania followed on 32% level. Influence of those measures on revenues of both states is hard to estimate because in 1995 Latvia and 1996 Lithuania was hit by banking crises which decreased significially revenues from taxes in first years after reforms. (Ole Norgaard. The Baltic States after Independence. Cheltenham Brookfield 1996) But comparing the growth rate of economies in Central Eastern Europe with flat rate personal income tax with growth rates of same region economies with progressive income taxation we can see that countries with flat rate grow significially faster. YEAR FLAT RATE COUNTRIES PROGRESSIVE RATE COUNTRIES 1995 4.3 3.0 1996 4.0 0.3 1997 8.0 1.4 1998 4.1. 3.3. Success of Baltic tax reforms encouraged Russia to start their own tax reform. On January 1, 2001, a 13% flat-rate tax on personal income took effect in Russia. Russia’s The flat tax has been remarkably successful. In 2001, personal income tax revenue totaled 255.5 billion rubles, an increase of 46.7% in nominal rubles, or 25.2% in real rubles after adjusting for inflation of 21.5%. In 2002 revenue from personal income tax amounted to 357.1 billion rubles, 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. In 2003 revenue generated by same tax was 449.8 billion rubles, 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. In the three years since the top rate of personal income tax 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, actually first time in the history of Russia people are really paying taxes. (Alvin Rabushka. The flat tax at work in Russia: Year three. Hoover Institution. Russian economy. 26.april 2004) Russian reform encouraged other countries move to flat rate personal income tax. In 2003 Serbia something similar to it and from 2004 Ukraine moved to the flat rate 13% personal income tax. In all those countries flat rate taxes have stimulated faster growth and more revenues. Most challenging tax reform in Europe was from 1.january 2004 introduced in Slovakia where VAT, corporate income tax and personal income tax were all moved to flat rate 19% level. It is to early to estimate results of Slovakian tax reform but soon now it has brought huge amount of foreign investments to Slovakia, stimulated growth and brought with first months 30% more revenues to state budget as expected, (Presentation of Prime Minister Miklas Dzurinda in European Parliament. 19.april 2004) From the 1.January 2005 Romania has introduced the flat rate tax – and it is a great success there. As a result of those examples more countries are planning to introduce the flat rate personal income tax. The last country to do this is Macedonia. It is possible to predict that with five years all Central and Eastern Europe will move to flat rate personal income tax – because flat tax works.