19 April 2007

Flat Taxes Creeping Westwards

It’s a firmly entrenched stereotype that the former Soviet states in Central and Eastern Europe look to the West for innovative trends and ideas. One notable exception is flat tax, almost untested in the West, which has become ever more popular in Central and Eastern Europe.

The purest flat tax policy was introduced in Slovakia with a 19% flat rate applied to income, corporate and consumption taxes. Since its introduction unemployment has halved and with recent reported GDP growth in Slovakia hitting 9.8%, it’s no surprise that Czech heads have been turned. In fact, over the last year when Czech professionals have found out that I’m interested in politics the most common question they’ve asked is when I think they will have flat tax.

In recent weeks, the Czech government has put a watered down flat tax proposal on the table. The new headline rate is 15%, but because this is applied to "super-gross income" (including employer contributions) it is estimated to equivocate to a 23% rate and of course its simplicity is diminished by this gimmick. Czech Business Weekly was disappointed with the timidity of the reform and led with the headline "It ain’t Slovakia", but also speculated that this reform may be a first step.

Former ODS finance minister and political big beast Vlastimil Tlusty is insisting on a full-blooded reform package exactly in line with the ODS election manifesto. I have sympathy with his view, but of course the ODS are leading the most fragile of coalitions. The ODS leadership are gambling by linking the approval of this legislation with the existence of the government so there are some interesting times ahead. Should the legislation be approved, it will take hold in January 2008 and flat taxes will take a further step westwards.

Flat taxes are not on the radar in British mainstream politics and I realise that they are not about to be, but the impact of overseas reform on UK industry is already noticeable if you follow these things. Although those in the Conservative Party who are looking for a shopping list of Tory tax cuts right now are being tactically naïve, we should be able to promise to simplify the British tax system – there’s plenty to go at there.


mens sana said...

The trouble with flat taxes in the UK is that with a sophisticated tax system and a large welfare state the flat tax rate would have to be above the current lower rate of tax to raise sufficient revenue. This would be pretty unpopular among the large number of lower rate taxpayers, and thus unlikely to be an electoral success!

Cutting taxes is the right way to stimulate the economy, but tax cuts have to be given to the less well off at least as much as to higher earners.

Mark Wadsworth said...

mens sana, if we keep the welfare state roughly as is (but with a withdrawal rate no higher than the flat tax rate), the flat tax/benefit withdrawal rate would not have to be much higher than 33% (current basic rate plus NI).

Provided of course that a load of exemptions would also have to be scrapped and the rate would have to be applied to ALL income, (including a lot of types of income that are currently taxes at rates that are lower than 33%).

Then get government spending down by 5% or 10% and hey presto, a flat tax for the UK of 25%.

Mark Wadsworth said...

PT, warming to my theme, these Eastern European so-called flat tax systems are a total con, national/social insurance contributions are between 30% and 60% of gross salaries. So that's far from flat.

As far as I can see, having a uniform rate across all sources of income is just as important as having the lowest possible flat rate (See previous post)

Praguetory said...

Simplicity and fairness are of course features of a good tax system.

Elaib said...

UKIP currently have a 33% flat tax as policy (including national insurance) with, I think a £9000tax allowance.