Flat tax[fr][de] 

Simply put, ‘flat tax’ means that everyone is taxed at just one rate. In such a system, in place of a complex set of income tax brackets, the state declares a threshold above which all parties pay a fixed rate on all their income. This threshold is normally low enough to provide an “incentive” for the citizens to prefer paying to dodging their taxes. Such a system taxes all income once and once only, on its inception. As regards corporate taxes, the idea is similar: one bracket should fit all. 

Analysts are inclined to point out that while in the first half of the 19th century the flat tax rate was the norm in the industrialising states, the first loud calls for a “heavy progressive or graduated income tax” came from Karl Marx in his 1848 Communist Manifesto. Eventually, however, it was the capitalist part of the world that adopted Marx’s call.

Since then, the idea has been resurrected a number of times, with quite a number of countries adopting one version or another of the ‘flat tax regime’. And yet, for all the recurring debates, to date no "major" Western economy has switched over (or back) to a flat-rate income tax regime. 

According to popular belief, taxpayers all over the world take some eight billion man-hours each year to fill out their tax returns.

The modern-day renaissance of the flat-rate income tax was initiated by Estonia in 1991, followed by Latvia (1994), Lithuania (1994), Russia (2001), Serbia (2003), Ukraine (2003), Slovakia (2003), Georgia (2004) and Romania (2005).

Bulgaria, Croatia, Greece and Hungary have also been toying with the idea of jumping on the flat tax bandwagon. 

Although ‘flat tax’ is not touted as a panacea to all economic ills, an increasing number of European countries – among them a few new EU member states – have introduced, are developing or at least are debating one-size-fits-all tax regimes. Most of these countries are confronted with sizeable budget deficits, and several face the need to align their economic status with the eurozone's requirements.

Flat tax is believed to: 

• help reduce red tape and associated difficulties and confusion
• reduce inequity (same rate for all) 
• counterbalance tax dodging and cheating
• provide incentives to work, save and invest 
• generate increased tax revenue, and thus 
• spark off a 'mini economic boom' 

At the same time, a flat tax regime is understood to

• eliminate practically all forms of tax exemptions and allowances
• be non-progressive (at least as far as the 'marginal' rates are concerned)
• favour the wealthy at the expense of the poor
• favour share and dividend-holders since profits are taxed only once, at source (ie 'flat tax' is a consumption-based tax) 

Whether the seemingly popular switch over to a flat tax system is driven by sound fiscal policy strategies or rather by a desire to somehow make the citizens pay more into the state’s coffers is a moot point. One key conclusion cited by several researchers is that the efficiency and success of a flat rate regime is inherently dependent on the actual level of the tax rate: the lower it is, the more efficient it tends to become.

Experts also call attention to the fact that a country’s competitiveness is determined by a number of other factors besides its tax system or the type of support the country gives to new investments. While it is generally true that lower taxes leave more money to circulate – and thus to be invested – in an economy, and that flat rates generally increase the citizens’ willingness to pay their taxes, lower taxes may also mean lower tax revenues, which in turn may be detrimental to the given state’s budgetary status. 

Furthermore, some leaders of Europe’s stronger economies, among them former German Chancellor Gerhard Schröder and Sweden’s Prime Minister Goran Persson have said that the eastern 'transition' economies can afford to cut taxes not least because any lost revenue is more than compensated by hefty subsidies from the EU. This argument has repeatedly been refuted by those 'transition' states affected. Meanwhile, Germany, as well as Italy, Austria, Finland, Denmark and Greece have also decided to introduce tax cuts in various forms and brackets in order to boost investment and spending and spur growth. 

During the past two years, the changes were as follows:

Top income tax and corporate tax rates in the EU-25 and the four candidate states (source: Heritage Foundation and national reports):

To date, the following countries have introduced flat tax regimes:

The Commission believes that there is no need for an across-the-board harmonisation of the member states' tax systems. Provided that they respect Community rules, member states are free to choose the tax systems that they consider most appropriate and according to their preferences. Meanwhile, the EU continues its fight against what it considers harmful tax competition. 

"Income tax is not only complex, it is perverse, diverting energy and resources into uneconomic behaviour forced upon people by the tax code itself," argues economist Andrei Grecu of the Adam Smith Institute. "In terms of growth foregone and effort misplace, its economic costs reach into billions of pounds each year, maybe tens of billions." Flat tax is “an idea whose time has come and there will be enormous advantages for the party that embraces it”, argues the institute's president, Madsen Pirie.

Proposals for a flat rate of income and corporate tax would increase investment in Europe's largest economy, said German government adviser Wolfgang Wiegard, a member of the panel that drew up a plan in 2004 for the German Finance Ministry. Under the plan, Germany should introduce a flat tax of 30% on all personal and corporate income. "Most elder members of the panel favor the flat tax," Wiegard said. "It's the younger economists who prefer the dual income tax.''

More recently, Chancellor Angela Merkel proposed a flat tax prior to the September 2005 elections. However, she backed off the idea at the last moment. The key advocate of flat tax in Merkel's CDU party, Paul Kirchhof, once described the scheme as follows: "Each person only has to pay 25 cents out of each euro earned. With the rest, he is set free in the garden of liberty". Mr. Kirchhof resigned from the post of shadow finance minister in Mrs. Merkel's shadow cabinet shortly after an election in which a great deal of the CDU's bad turnout was blamed on his theses. 

However, German economist Alexander Klemm has told BBC News that according to analyses conducted in Russia following the introduction of the flat-rate income tax in 2001, “overall the tax reform was certainly not paying for itself, in the sense that cutting tax rates has not led to higher tax revenues”. 

In Britain, the shadow chancellor of the Conservatives, George Osborne, has set up a commission to look into the idea of a flat tax regime. However, the Chancellor of the Exchequer, Gordon Brown, is known to be unenthusiastic about flat tax.

Poland was planning to table proposals for a flat tax in early 2007. However, following the September 2005 elections, a compromise plan was in the making between the victors of the vote (the Law and Justice Party) and the runner-up Civic Platform. The latter's aim has been to introduce a 15% flat tax, while the former has proposed an update to the country's progressive taxation scheme.

According to former Hungarian Prime Minister Viktor Orbán, leader of the main conservative opposition party FIDESZ-MPP, Budapest will have “no choice” but to jump on the “flat tax bandwagon” in order to maintain the country’s competitiveness and retain a fair share of foreign investments. However, Economic Affairs Minister János Kóka has said that for now, Hungary "prefers not to follow the fad".

Czech Prime Minister Stanislav Gross is also in favour of a simplified tax system. However, while announcing that his country's growth rate is twice as high as that of the eurozone average, he also said that Prague will not introduce a flat tax rate.

The centre-right government of Slovakia is in favour of a flat tax and was hoping for support from Germany nefore the elections there. After the German elections, Slovakia said it was "surprised" by German allegations fo tax dumping. 

"In the run-up to accession, the EU asked the newcomers from Central and Eastern Europe to phase out all discriminatory tax incentives, in particular those for foreign investors," writes Katinka Barysch of the Centre for European Reform. "To keep their economies attractive, many of the new members have responded by cutting overall tax rates for both domestic and foreign investors. Since these cuts are not discriminatory, there is nothing the EU can ­or should ­do about them. So why are some old EU members so upset about East European taxes? Perhaps some governments want to divert attention from the pressing need to clean up their own tax systems".

The Centre for Policy Studies (CPS)  has argued that "An attractive panacea - such as the flat tax - will not in itself solve the problem of complexity". CPS believes that a sudden and sharp cut in tax rates could spark off "immediate and potentially huge shortfalls that could destroy confidence in the economy".

"Economists can debate the theory endlessly. Everyone has neat curves showing government revenue rising as taxes fall, and vice versa. Yet this debate doesn’t have to be conducted in charts, or tested only in lecture halls," writes Matthew Lynn, a columnist for Bloomberg. “Flat taxes have been introduced in several former communist countries in the past few years. So far, the evidence shows they are working.”

"It took me 10 minutes to do the sums that proved [flat tax] would not work, and half of that was finding the figures on the internet. Don't they have any researchers?", the Independent has quoted Brian Reading and Charles Dumas of Lombard Street Research as saying.