Flat Tax Revolution in Central Europe
Backgrounder:
Flat Tax is type of taxation structure where everybody is taxed uniformly at a single rate. Under such a system, in place of a multiple and intricate income tax slabs, the state stipulates a ceiling, exceeding which everyone pays a fixed rate on all their income. With a view to encourage tax payment instead of tax evasion, the ceiling limit is fixed low enough which provides an incentive for the citizens to pay tax. Under the Flat Tax system, there is a single taxation on its inception. In respect of corporate tax, the concept is also similar where there is a similar structure for everybody. Several countries have adopted Flat Tax is a phased manner starting with Estonia in 1991, Latvia in 1994, Lithuania in 1994, Russia in 2001, Serbia in 2003, Ukraine in 2003, Slovakia in 2003, Georgia in 2004 and very recently Romania in 2005. Even though Flat Tax is not hyped as the cure-all for every economic problem, more and more European nation and out of them a few nations who have recently joined the EU fold have introduced or are preparing for a single tax structure. (Flat tax: www.euractiv.com)
The problem for most of these countries is that there is a high level of budget deficit and many countries are confronted with the necessity to align their economic position with the Eurozone's needs. The merits of Flat Tax are to (i) help in the reduction of bureaucratic tardiness and its connected problems and uncertainty. (ii) Lower the problem of inequity by fixation of an identical rate for everybody (iii) offset tax evasion and corruption. (iv) Provide drive to work, save & invest (v) yield increased revenue by way of taxes and therefore (v) kick-start an economic boom in a small scale. On the other hand, criticism leveled against Flat Tax are that it (i) eliminates almost every types of tax exemption and allowances (ii) unprogressive so far as the 'marginal rates' (iii) skewed in favor of the rich at the cost of the poor (iv) supportive of the people who receives dividend as profits are taxed at source only indicating that Flat Tax is a consumption-based tax. (Flat tax: www.euractiv.com)
Burning Issues:
It is debatable if the apparently popular changeover to a Flat Tax system is propelled by a sound fiscal policy or it is one more ploy by the state authorities to make the taxpayers dish out more to fill the Government's treasury. One important decision by several research professionals is that the competence and success of a Flat Tax system is intrinsically dependent on the real rate of the tax rate which means the lower the tax; the more efficient it tends to be. Specialists' even point out to the fact that a nation's level of competitiveness is determined by several other factors apart from the tax system or the nature of support the nation renders to fresh investments. Whereas it is a fact that a lower tax rate system leave more money for circulation and therefore to be invested in an economy, and flat tax rates normally increase the eagerness of the citizens to deposit their taxes, lower rates of taxes also implies lower tax revenues, which in turn may be unfavorable for the particular state's budgetary position. (Flat tax: www.euractiv.com)
Moreover, many leaders of the Europe's well performing economies like German Chancellor Gerhard Schroder and Prime Minister of Sweden Goran Persson have stated that transition economies of Eastern Europe can manage to lower taxes not least since any revenue loss is more than offset by heavy subsidies from the EU. This disagreement has continually been countered by those 'transition' states that are affected. In the meantime, Germany, as also Italy, Austria, Finland, Denmark & Greece have too decided to effect tax cuts in various categories so as to improve investment and spending and encourage growth. According to Wolfgang Wiegard, adviser to the German government, suggestion for a flat rate of income as well as corporate tax would increase investment in Europe's biggest economy. In keeping with the proposal, Germany must administer a flat tax rate of 30% on all personal and corporate income. Wiegard had observed that majority of the older members of the panel support the flat tax, as against the younger economists who are in favor of the dual income tax.
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