Issue 02, € 1 The Newsmagazine of the Europeans for Tax Reform THE FLAT TAX MIRACLE How the fl at tax saved and saves the southern Balkans countries during the economic crisis. Babara Kolm, President of Hayek Institute Vienna Freedom for Europeans The Flat Tax- Freedom for Europeans Europe needs the fl at tax now. The fl at branded determinedly as the last and tax is the essential element for eco- fi nal. Real growth can just kick in by nomic freedom for Europeans and for changing the way we work in Europe generating growth in Europe again. and how we reward performance and Europe needs growth to get out of the hard work. Lower, simpler and fairer mess of ever growing debts and the and therefor fl at tax systems are es- ever deepening crisis of 2008 to 2013 sential for this. Eastern Europe has which seems to entrench itself for the shown the way. In most of the Eastern rest of the decade. Further government half of Euorpe the fl at tax was intro- Gunther Fehlinger, Chairman of spending, lower interest rates and duced during the last decade and the Europeans for tax Reform monetary easing have reached their results are excellent. The fl at tax coun- natural ceilings and are just adding to tries have handled the crisis in both more or less good years to build their the medium term bundle of problems economic growth and government fi - economies and societies from half a with asset infl ation in central European nances much better then the western century of neglect and misuse of their markets in both stock and property al- peers and this despite that all of them ressources and people during commu- ready showing the way towards further are from amuch more fragile econom- nism. And it is the people that matter troubles ahead. Europe handling itself ic backgorung and weaker industrial and their motivation to work and to per- from quarterly rescue packages each base and had just 10 or maxium 15 form and to take risks and to invest and 1 No need for draconian measures One common, famous way to boost your economy…Flat Tax tion. If employees of the public sector wish to be bribed in order to increase their income, they can easily deduct Flat Tax the imposed tax amount. In this way Progress and Wealth. they will give a hurt to the revenues of the government and increase their own income. As long as a fl at tax system is established, this phenomenon can be By Dr. Barbara Kolm avoided. Regardless the earning in- come of the individuals, they are sup- In the early ‘80s, Robert Hall and Alvin posed to pay a fair, equal and certain Rabushka developed a consumption tax rate. Thus, nobody has an incentive tax system in order to achieve some of to bribe a public employee. the administrative advantages of a val- • It gives incentives to entrepre- ue-added tax (VAT) relative to a sales neurs to expand their businesses. The tax. The Hall-Rabushka system is often more a person works the more he earns called “fl at tax”. if the tax rate remains stable and equal It imposes a 19% corporate tax on all for all, regardless their income. In this Since then, Greece started losing jobs businesses. The wages, pension con- way, the wealthy can earn more, invest to Bulgaria because of the high com- tributions, materials costs, and capital more in businesses and create new petitiveness that the fl at tax system investments are deducted from the tax jobs. Unemployment will be reduced offered. Greece should adopt the fl at base. Individuals are also assessed by and the whole economy will boost. tax system in order to increase its rev- a 19% fl at tax rate on wages and pen- enues, to evade the government cor- sion benefi ts above an exemption of • It provides opportunities to the ruption and to try to relocate some of $25,500 for a family of four. No other middle class to get wealthier and to the 6,000 Greek businesses which are income is taxable, and no other deduc- save more of their earnings. now camped out in Bulgaria. tions are allowed. The fl at tax system To fi nalize, there is a vast range of has served as a blueprint for many • The fl at tax system provides in- exemplary countries that introduced countries that wished to change their centives for people to get involved with the fl at tax system and enhanced the tax system. Since 1994, the fl at tax charitable giving. Taking for granted the whole economic condition of their own system has been widely established stable taxable amount, people can af- country. A fl at tax system could work in Estonia, Russia, Georgia, Slova- ford to help charities. Additionally, not out as a regime for every “sick” econo- kia, Latvia, Ukraine, Serbia, Romania, just the wealthy, but even the middle mies. There is no need of implementing Macedonia, Albania and the Czech Re- class-which gets wealthier- can sup- draconian measures. public. But, what makes fl at tax system port charities improving the so called special? How does fl at tax system ben- low class’ standard of living. efi t an economy? • It reduces compliance and ad- These are just some signifi cant ben- ministrative costs. The cost of admin- efi ts of a fl at tax system. Furthermore, istering a complex tax system is huge. there is another interesting example By simplifying the tax code there are which confi rms our statement. Since signifi cant savings in administration to 2008 Bulgaria has a fl at tax system be made. On the opposite, the fl at tax with a 10% income tax rate, 10% cor- is a simple, clear for everyone and de- porate rate and a VAT of 20%. The 10% 10 % mands less taxation´s procedure. fl at tax made Bulgaria the country with • A fl at tax structure increases the lowest personal tax rate among the the tax revenues. The lower income tax member states of European Union. Its decreases the revenues but effi ciently 10% social security fl at rate attracted facesthe problem of tax avoidance and potential employers and investors. evasion. More corporate taxes will be When Bulgaria implemented the fl at max.tax paid with a fl at tax system and reduces tax, its revenues rose 5.24% in the fi rst incentives for the entrepreneurs to get year compared to the last year (of the involved with illegal activities. previous tax system) and attractedma- balkan • It reduces government corrup- ny Greek companies to relocate there. 2 EBy Gunther Fehrlingerditorial innovate. And the tax rate is the cost was ready for it then. European leaders which a society asks for its cost from still shy away from leading their nations the individual and in eastern Europe and facing them with the fundamental people understood that progressive truths of globalization that we are now taxation is unfair and leaves everybody 7 billion people competing, working and worse off. In Western Europe we are innovating and learning and improving still in the second stage of the econom- around the world in basically one and ic freedom agenda after the privatiza- the same market. The easy times when tion drive of the 80ies towards the mar- Western Europe and the USA were ket liberalization campaigns of the last running the world markets and the rest 20 years western European elites and of the world was articiallyself excluded their electorate still hesitate to go to the by its communist dictators are gone for 3rd stage of liberating the individual good and will never return. America as much too high to afford and so this is not of excessive and progressive taxation the always more fl exible, more open serious and better to keep the present and so given him and her the freedom and adaptable economic system with progressive system standard in West- of spending the fruits of his and her all the advantages and costs which ern Europe then and still now. During labor in his and her discretion and so global leadership accompanies is fast- the collective panic which shocked Eu- entrusting him and her to do the right er and more accurately facing this new ropean leaders post September 2008 thing with his earnings. Western elites realities. Europe is fi rst time in danger Lehman collapse debt ceilings were no did not fancy this freedom because the of losing out on the long term. What more and within 2 years a swooping power which comes with the abilty of about the European dream of the ever 20% percentage point was added to command of budget equal to half the closer and stronger and more competi- most debt per GDP ratios presumably earning of a countries population is tive Europe when we are growing just to safe European economy but seem- very seductive and such money allows 0,5% for years and riot police is out ingly not creating stability and growth to do a lot of things which help to justify in Athens every night? And please let but leading to the present shameful the elite and size of government itself. us not forget the Lisbon agenda which European debt crisis which is shaking Whatever social or environmental or was the benchmark exercise of Europe Europe in its core. It can be assumed other issue of concern there is always to become the most competitive region that the transition costs of introduction government money ready to throw at it of the world from 2000 onwards.