The European Tax Revolution Eastern European countries are leading the way in setting flat tax rates
By Allston Mitchell Tiscali Europe | January 13, 2005 http://europe.tiscali.co.uk/index.jsp?section=Current%20Affairs&level=preview&content=303883 Ever since the beginning of the twentieth century European countries and the United States have seen a move away from a flat rate tax. The idea of gradually increasing tax levels for those earning higher salaries is attributed to Karl Marx and Frederick Engels who in their Communist Manifesto said that "A heavy progressive or graduated income tax" would be generally applicable in advanced countries along with the abolition of property and rights of inheritance and numerous other ills. Gradually during the course of the twentieth century and particularly after the Second World War welfare states were begun to be put in place which required enormous investment from central government. The concept that those earning well over the average should also pay over the average in terms of tax took hold and was justified by a sense of equity and ethics in the redistribution of wealth and as a means of plugging the holes in a leaky capitalist system. The Gipper Ronald Reagan in the 80s was the first to resurrect the concept of a flat rate of tax but the timing was not right. Nevertheless right-wingers in the United States aligned themselves behind this policy shift and have been pushing for a revolution in tax rates ever since. The concept that a multi-millionaire should pay the same rate of tax as a bus driver would still find many opponents in what many consider a United States completely purged of dubious Socialist tendencies. The tax debate was put back on to the front burner by this George W. Bush administration with its massive tax cuts that favoured the very wealthy. George W. Bush and his advisors were probably surprised at how easy it was to bamboozle the electorate with legislative cut off periods and the difference between income tax and payroll tax which may pave the way for more radical reform in the tax system. Some right-wing militants are even dreaming of a very low flat rate tax with the burden of federal income being placed on a larger federal sales tax. However, this may have serious repercussions on an economy that depends almost exclusively on consumer spending. The Irish Experience Ireland, now dubbed the Celtic Tiger, joined Europe in 1973, at the time its per capita income was just 62% of the EU average; in 2002 it stood at 121%. The achievement is put down to very low corporate tax rates which encouraged an enormous influx of foreign direct investment. In Ireland the corporate tax rate was once over 40% but it now stands at 12.5%. There appeared to be no detrimental effect on the unemployment rate either with a current rate of just under 5%. In May 2004 ten new countries joined the European Union, eight of which were ex Communist countries and were considered to be "transition economies", the other two were Cyprus and Malta who were not in transition but which had problems of their own. So when in 1994 Estonia set a flat tax rate of 26% not too many eyebrows were raised as it was considered a temporary measure that would give the country the flexibility to move from a centralised government controlled economy to a free market economy. However, the Estonian plan is to reduce the rate to 20% in 2007. Ten years on and Estonia still has a flat rate of income tax but the small Baltic state is no longer a lone voice in the wilderness. In 2001 Russia's President Vladimir Putin set what was seen as a truly low flat rate tax of 13%. This was partly due due to an attempt to counterbalance the enormous amount of tax evasion that went on in the country. The idea was to set the tax rate so low that people would be be encouraged to pay it rather than deal with the bother of being caught. The idea appears to have worked. Domino effect Following in the wake of the Russian move which some people say is still a transition economy despite its size, Georgia, Serbia, Slovakia, Ukraine, all followed suit with a flat rate of tax. Last week Romania joined the club and set a flat rate of tax of 16%. There is some debate however as to whether the move in these countries is motivated by ideology and fiscal policy or just a desperate attempt to get people to pay some tax. The important thing at this point is probably just to get them registered and under the watchful eye of the revenue department. The Laffer Curve There are those that still continue to sustain that there are economic reasons behind lowering tax rates based on something called the "Laffer Curve". The American economist Arthur Laffer back in the 70s drew a graph on a restaurant napkin in an attempt to explain that there is a way of maximising and optimising tax revenue by actually reducing tax rates. The theory was lionised for a few decades by right wing politicians but few serious economists now give the idea the time of day. Other new European states such as Poland, Hungary and Latvia have also cut corporation tax to under 20%. Slovakia now has a 19% flat tax for both corporate and income tax. In Germany the corporate tax rate is about 39% and in Sweden it ranges from between 30% and 60%. There are developed economies in western Europe where there is still an extensive black economy notably in Spain and Italy where it is thought that as much as 20% of the economy is "under the table". Some have recommended reducing the tax rate if only to bring the lost evaders back into the fold. "You pays your money and you takes your choice" In many of the arguments that support the lowering of tax rates and the setting of a flat rate of tax there is one significant part of the debate which is missing. The governments of western Europe have been financing the welfare state and the state infrastructure (roads, schools and defence for example) and it is not clear who will be picking up the tab if the government is no longer in a position to pay for the upkeep and development of the country's infrastructure. Only a cursory glance at some Scandinavian countries whose social models are considered so outdated will show that taxpayers do actually get quite alot for their money, and they pay a great deal of it. They have a rich social fabric and a strong safety net. In Italy and Greece, taxpayers may pay less tax but they get precious little for their money. Nagel and Murphy The US philosophers Thomas Nagel and Liam Murphy decided to open the debate some years ago in their book "The Myth of Ownership. Taxes and Justice" in which they say that there is such a thing as a conception of economic and distributive justice but that there is no such thing as "pre tax income". They opened a debate which is destined to become ferocious over the coming decades as the push to reduce tax payments and reduce the role of government takes hold in the developed world. No subsidies then.... There are those that have taken something of a dim view of the eastern European inclination towards low flat tax rates such as the Swedish Prime Minister G�ran Persson and the German Chancellor Gerhard Schroeder who have said that if these so called transition economies can afford these huge tax cuts they can probably afford to do without the hefty EU subsidies that they are counting on. This is of course a provocation but the point has not been missed that these Eastern European countries are trying to undercut the market of these established European economies by attracting foreign direct investment with their low corporate tax rates and cheap labour costs. It appears that a war of competitive devaluation that one finds in the currency markets may begin to take place with competing tax rates and labour costs within the EU25. The ball is rolling. Governments throughout Europe are pursuing the new orthodoxy which has been adopted with surprisingly little discussion. The Italian Prime Minister Silvio Berlusconi has made tax cuts the standard bearer of his coalition government and he recently included EUR 6 million of income tax cuts in his budget but with some phenomenal cuts in public spending to pay for it. Wealthy Italians are now much more so. Germany has cut the top income tax rate from 45% to 42%. Austria is cutting its corporate tax rate to 25% from 34%. Denmark is cutting its corporate tax rate to 28% from 30%. In Finland corporate tax rate is being reduced to 26% from 29%. In Portugal the government is cutting income tax from 12% to 10.5% for the lowest earners. Nevertheless there is still a hefty 40% rate for those earning over EUR 54,000. The European social model is about to undergo a revolution but the debate so far has been somewhat embryonic. Are tax cuts really the solution to Europe's economic woes? Coupled as they would be by greater job insecurity many think that those that would benefit would be the very few at the top of the heap consigning the average worker to disintigrating social services and a life of anxiety that would be more reminiscent of 19th century Europe than 21st century Europe. ------------------------ Yahoo! Groups Sponsor --------------------~--> In low income neighborhoods, 84% do not own computers. 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