Reformers in Central and Eastern Europe are once again adhering to a “Marxist ideal” in the shape of flat taxes, argues S. Adam Cardais in a 30 July article for Transitions Online. However, economic miracles are not made of flat taxes alone, he warns.
Cardais draws attention to the fact that today it is the West that is sticking to progressive tax systems, while the former Soviet bloc countries are adopting a single rate of tax for all earners regardless of income.
Nowhere else in the world has the flat tax caught on more swiftly than in Central and Eastern Europe, he remarks – where nine of the world’s total of thirteen countries have adopted the system. Estonia was the first to do so in 1994, he observes – sparking a reform process that culminated in Slovakia’s adoption of a single 19% rate on income, corporate and value-added taxes in 1997.
Bulgaria recently announced its intention to introduce a flat income tax rate of 10% later this year. Meanwhile, the Czech Republic plans to introduce a flat rate of income tax of 15% next year, with a 19% corporate rate to follow by 2010. Moreover, Albania plans to halve its income and corporate tax rates to 10% in 2008, adds Cardais.
Flat tax supporters claim that it is a “simple, transparent system that spurs economies, attracts investors, and increases revenue by discouraging evasion”, writes Cardais – though he believes that it may be “getting more credit than it deserves”.
The article suggests that the reforms in Central and Eastern Europe do not meet the true definition of a flat tax because they include deductions, exemptions, and other exceptions, as well as a lack of transparency. Citing the Czech Republic, Slovakia and Albania as examples, Cardais suggests that the term has been used as a code for lowering taxes, claiming that “flat tax is often nothing more that tax cuts in fancy dress” – which means that governments may not be able to afford to embrace the system for long.
Although revenue from higher VAT can offset losses, Cardais believes this will prove unacceptable to the lower and middle classes. Moreover, it is unclear whether companies prioritise corporate taxes when choosing investment locations, as political climate, infrastructure and the quality of the labour force may take precedent, he believes.
Tax schedules in the region may have to be revised under Western pressure, Cardais adds, as complaints that lower tax rates give these states an unfair advantage in attracting business are growing – with accompanying threats of cuts in EU funding.
The article concludes by suggesting that the flat tax countries may run into problems once the “short-term high” fizzles out, as they confront “an increasingly hostile Western Europe and an under-funded state” that becomes “politically unpopular” and no longer as attractive to foreign investors.