[GJM] [Intertax] Flat tax a flash in the pan - from this morning's FT

[robert searle]

--- Richard Murphy <richard_murphy at btconnect.com>
wrote:

> Flat taxes could be a flash in the pan, IMF research
> says
> 
> By Vanessa Houlder in London 
> 
> Published: October 19 2006 03:00 | Last updated:
> October 19 2006 03:00
> 
> Some countries that have pioneered "flat" taxes
> could be forced to abandon them, according to
> research published by the International Monetary
> Fund, which said the advantages of imposing a single
> tax rate had been exaggerated.
> 
> "While there will no doubt be new members of the
> flat tax community, in some respects the more
> interesting question is whether there will be any
> defections," said the working paper. It conceded
> flat tax reforms had become "something of a craze"
> in recent years.
>  
> 
> But the discussion of the flat tax "had been marked
> more by rhetoric and assertion than by analysis and
> evidence", it said.
> 
> Flat taxes have been adopted in Estonia, Lithuania,
> Latvia, Russia, Ukraine, Slovakia, Georgia and
> Romania - although there are large variations in
> their design.
> 
> Several other countries, including Costa Rica, the
> Czech Republic, Mauritius, Poland and Slovenia, are
> considering their introduction.
> 
> The recent popularity of flat tax systems followed
> their apparent success in Russia.
> 
> Moscow's 2001 reform, which combined a flattening of
> the rate structure with a tax cut, was followed by
> an increase in revenue from income tax of more than
> a quarter in real terms. But there was little
> evidence that the revenue increases were due to the
> flat tax, said the researchers. "Rather, it appears
> to have reflected wider macroeconomic activity."
> 
> The Russian reforms may have improved compliance, as
> some taxpayers paid more tax than they did
> previously. But the experience of countries using
> flat taxes, including Russia, suggested that these
> behavioural effects were not large enough to offset
> the direct loss of revenue from the reduction in tax
> rates.
> 
> Flat taxes fail to deal with "the difficulties that
> almost all countries now perceive in taxing
> internationally mobile capital income", said the
> working paper. It predicted that some countries
> might be forced to decouple the taxation of capital
> income from that of labour income.
> 
> It also highlighted political difficulties arising
> from the tendency of workers on middle incomes to
> lose out from flat tax reforms.
> 
> The simplification achieved by flat taxes can also
> be exaggerated, even though some countries such as
> Slovakia and the Ukraine have simplified their
> regime by removing exemptions.
> 
> The researchers questioned whether flat tax
> structures would prove sustainable as countries' tax
> systems become more developed.
> 
> "The strengthening of the additional tax [on income
> above a threshold] in Serbia in 2006 and the
> discussion of flat taxation in the 2006 elections in
> the Slovak Republic, suggest the flat tax may not
> prove politically robust in the years ahead," it
> said.
> 
> Copyright The Financial Times Limited 2006> _
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