The flat tax is making a comeback. After being banished to the political wilderness after Steve Forbes made it the central issue of his losing campaign for the Republican presidential nomination in 1996, interest is perking up again. One of the Democrats running for president could do himself (or herself) a lot of good by picking it up.
The immediate cause for renewed interest in the flat tax is an order by Paul Bremer, administrator of the Iraqi Provisional Authority, establishing a 15 percent flat rate tax in that country. The order was signed on Sept. 19 and takes effect on Jan. 1. A Nov. 2 report in The Washington Post said that Bremer's action was sparking a new drive among those like Forbes to revive the issue here.
Actually, the Post didn't quite get the story right. Bremer's order merely says the following: "The highest individual and corporate tax rates for 2004 and subsequent years shall not exceed 15 percent." While the intent may have been to have a single 15 percent rate, the order does not preclude progressive rates up to 15 percent. Moreover, because the tax base is not specified, one could easily create effective tax rates well above the statutory maximum by allowing multiple taxation of the same income.
While advocates of the flat tax are, nevertheless, pleased with the Iraqi initiative, they are actually much more excited by what is going on in many former Soviet bloc countries. Estonia established a flat tax in 1994, Latvia in 1995, and Russia in 2001. Earlier this year, Ukraine adopted a flat tax beginning next year, and on Oct. 28 Slovakia became the latest country to do so. China is said to be interested, as well.
A key factor driving all of these countries to adopt radical tax simplification and a lowering of rates is tax evasion. They were simply unable to collect sufficient revenue under the complex, high-rate tax systems they had previously. In every case, implementation of a flat tax caused collections to rise, as the benefit of evasion was reduced. (If the top rate is 50 percent, failing to report $1 of income saves you 50 cents in taxes. But if the rate is only 13 percent, as it is in Russia, evasion saves you only 13 cents -- no longer worth the risk of getting caught for many evaders.)
Bruce Bartlett is a former senior fellow with the National Center for Policy Analysis of Dallas, Texas. Bartlett is a prolific author, having published over 900 articles in national publications, and prominent magazines and published four books, including Reaganomics: Supply-Side Economics in Action.
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