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Report: The spreading hegemony of the flat tax

We begin this progress report on the global flat tax revolution with the curious case of the Pridnestrovie Moldavian Republic, a secessionist enclave (population: 537,000) that acquired de facto independence from Moldova 15 years ago in the four-month War of Transnistria.

Moldova itself, in earlier times one of the republics of the Soviet Union, now aspires to membership in the European Union. The breakaway Pridnestrovie (known also as Transnistria) aspires to some form of union with Russia. Bereft of industry in a backward part of Eastern Europe, these neighboring Romanian states are reputed to share one superlative attribute - the cleanest air in the world. Although Pridnestrovie itself remains defiantly authoritarian (and its „super-president,” Igor Smirnov, has on occasion won as many as 103% of the ballots cast in some district elections), the emergent state now seeks to build a free-market economy. To speed the process, it has adopted a flat tax - at a rate of 10% - on all personal and corporate income. In doing so, it becomes the eighth jurisdiction from the old USSR to opt for a flat-tax regime. (The others: Georgia, Estonia, Latvia, Lithuania, Ukraine, Romania and Russia itself.)

More importantly, Poland will be the next European country to adopt flat taxes. The center-right coalition that decisively won Poland’s national election in October has promised to implement a flat tax (rate: 15%) by 2009. As the biggest of the new member states of the European Union, Poland’s decision will have consequences - especially for next-door Germany, which clings to a progressive top income tax rate of 47.4%. Germany’s tax code is one of the most bureaucratic in the world - with 28,000 pages of regulations that administer 118 laws that require the filling of 185 forms. Germany’s annual cost of tax collection: €3.7 billion ($5.4 billion).

The Czech Republic, also next door to Germany, introduces its own flat tax reforms on Jan. 1 at an initial rate of 15% but dropping to 12.5% one year later. It will cut its corporate income tax rate (to 19% from 25%) on Jan. 1, 2010. The country’s precariously balanced 200-member lower house of parliament approved these flat tax reforms by 101 votes; Czech President Vaclav Klaus, a free-market economist, will have no problem getting them through the upper house, where the government has a large majority. Bulgaria also introduces flat taxes in the new year, becoming the seventh EU country to choose a flat tax regime for personal income taxes. The rate will be 10%. Bulgaria’s parliament adopted the reforms by overwhelming majority - 152 votes to 36 votes.

Elsewhere, Mauritius, the island nation in the Indian Ocean, decided two years ago to introduce flat taxes, deciding to implement them in 2009. For one reason or another, it couldn’t wait. It introduced the new system this past summer instead, using the same rate – 15% - for personal and corporate income. And Hong Kong, where citizens can choose to file either a progressive tax return or a flat tax return, has reduced its flat tax personal rate to 15% from 16% and its corporate rate to 16% from 17%. In response, Taiwan has announced that it will cut its corporate rate to 16.5% from 25%. The Flat Tax of the Year Award, however, goes to Georgia, the former Soviet republic that adopted flat taxes in 2005 (personal rate: 12%; corporate rate: 20%). Tax revenues have shot up dramatically, rising from 14.5% of GDP in 2003 to 22% in 2006 and headed for 24% of GDP this year - indicating (according to US supply-side economist Alvin Rabushka) it’s now time for Georgia to cut its rates yet again.

Earlier this year, incidentally, Minnesota-based 3M Co. announced, that it will close down some of its operations in North America, Western Europe and Japan, and relocate these operations to lower tax rate countries. The company now pays taxes at an average rate of 33%. By reducing this rate a mere 2.5 percentage points, 3M says, it will save $200-million (US) a year - though the company says it will reduce its average rate by more than 2.5 percentage points. With annual sales of more than $1 billion (Canadian) a year, 3M Canada operates in six communities - Montreal, Calgary, Toronto, as well as in London, Perth and Brockville, Ont. - all of which should make a Post-It note: Canada’s corporate rate is 32%. Some of these 3M operations could soon take flight to more hospitable tax territory somewhere in the old Soviet Union. (theglobeandmail)