On his trip to Slovakia last week, President Bush praised Prime Minister Dzurinda for the flat tax system he instituted last year. Bush noted that the new tax regime simplified tax collection, attracted foreign capital, and created economic vitality and growth.
Three years ago, Bush made a point of congratulating Russian President Putin for his country's flat tax, which took effect on Jan. 1, 2001. On that occasion, Bush particularly noted the fairness of the Russian system, which treats taxpayers equally, rather than punishing the successful merely for being successful.
Hoover Institution political scientist Alvin Rabushka points to eight different countries in the former Soviet bloc that have adopted some form of flat tax in recent years. In addition to Russia and Slovakia, they are Romania, Georgia, Estonia, Latvia, Serbia and Ukraine. He predicts that Poland and the Czech Republic will soon joint them.
Why so much interest in the flat tax? A key reason is that it is far more effective at raising revenue than progressive rates. With progressive rates, it looks as if extra revenue is being extracted from the wealthy. But it is also giving them a powerful incentive to arrange their affairs so as to minimize their tax liability or to evade taxes altogether.
With a flat tax, there is much less incentive to engage in tax avoidance or tax evasion. Also, the knowledge that everyone is being treated equally helps eliminate the culture of evasion that often becomes pervasive in high-tax countries, which often drives even the law-abiding into the underground economy.
Consequently, it comes as no surprise that a new study by the International Monetary Fund found that Russia's flat tax led to a substantial rise in government revenue. This was due almost entirely to a sharp increase in compliance, which significantly raised the share of income declared on tax returns.
While compliance here is not as bad as it was in Russia before its tax reform, it is a growing problem. In his new book, "Many Unhappy Returns" (Harvard Business School Press), former Internal Revenue Service Commissioner Charles Rossotti warns that we are approaching a crisis in tax administration. He estimates that in 1999, the IRS was only able to collect about 17 percent of the $277 billion that corporations and individuals failed to pay that year, leaving $230 billion uncollected.
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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