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.