Global economy demands tax reform

January 18, 2006

Free Market Foundation

(Incentives and disincentives play a huge role in all economies)

Rather than just consigning America to a global game of economic catch-up, U.S. policymakers should look to Eastern European nations that have adopted successful fundamental tax reforms for answers, says Ryan Kool of the National Taxpayers Union (NTU).

There is persuasive evidence that flat-rate income tax systems can place countries on a solid competitive footing, says Kool. An analysis of Estonia, Latvia, Lithuania and Russia the four countries that have had a flat tax in place the longest shows significant economic trends:

Since Estonia ratified a flat tax in 1994, annual gross domestic product (GDP) growth has averaged about 6 per cent since 1997 and one-tenth of its domestic base consisted of Foreign Direct Investment (FDI) in 2003.

Revenues have also exceeded expectations, prompting policymakers to approve a cut in the 26 per cent tax rate to 20 per cent by 2007.

During the first five years (1995-2000) of operating its flat tax, Lithuania’s GDP jumped an average of 22 per cent annually and has trended at 7.4 per cent since 2000; similarly, Latvia’s GDP has gained over 11 per cent each year since 1997, helping to spur annual growth in government revenues of roughly 10.5 per cent during this period.

Despite a large “shadow economy,” Russia has experienced a 35 per cent annual increase in government revenue since enacting a flat tax in 2001 perhaps the most convincing case thus far that the simplicity and lower rate of a flat tax encourages compliance with tax laws.

The flat tax is spreading to Western Europe, into countries with stagnating economies and skyrocketing unemployment levels. Indeed, the United States, with its 6.6 billion-hour tax paperwork burden and dramatic decrease in FDI inflows, should be next, says Kool.

Source: Editorial, To Compete in a Global Economy, U.S. Must Discard Backward-Looking Tax Policy, Study Concludes, Capital Ideas, September/October 2005; based upon: Ryan Kool, The Flat Tax: A Worthy Competitor in the Global Economic Game, National Taxpayers Union Foundation, September 14, 2005.

For text: http://www.ntu.org/main/press_release.php?PressID=768&org_name=NTUF

For Kool text: http://www.ntu.org/main/press_papers.php?PressID=766&org_name=NTUF

For more on Taxes: http://www.ncpa.org/pi/taxes/

FMF Policy Bulletin/ 10 January 2006