(E) Why the Flat Tax for Croatia by Dr. Alvin Rabushka
International Leaders Summit: Why the Flat Tax isGood for Croatia
Very important article on the Flat Tax written by Dr. Alvin Rabushka and custom designed for Croatia:
Why the Flat Tax is Good for Croatia
By Dr. Alvin Rabushka, Senior Fellow, Hoover Institution, Stanford University, California and Former Tax Policy Advisor to President Ronald Reagan
During the past ten years, six former Soviet-bloc countries in Central and Eastern Europe have replaced their personal income tax systems with a simple flat tax. The first was Estonia in 1994. It has since extended its reform to abolish the corporate tax on retained earnings and programmed further reductions in the personal tax rate. Next was Latvia. The largest and most important country to follow was Russia. Beginning January 1, 2001, it replaced a three-bracket system topping out at 30 percent with a flat 13 percent rate. Russia also reduced its corporate tax rate from 35 to 24 percent, and lowered the tax on small business. In 2003 Serbia introduced a 13 percent flat tax, Ukraine 13 percent and Slovakia 19 percent in 2004. The new government of Georgia has pledged to adopt a 12 percent flat tax later this year.
The results have been uniformly successful. After adjusting for inflation, real personal income tax revenue in Russia doubled between January 2001 and July 2004. Slovakia is now a magnet for international investment. Several political parties in Poland and the Czech Republic have embraced the flat tax. China is currently considering the flat tax to replace its nine-bracket personal income tax with its top rate of 45 percent. Why have these countries adopted or considering adoption of the flat tax?
So-called progressive income taxes impose graduated rates on progressively higher levels of income, which distorts investment, and discourages work and saving. In contrast, after allowing for a personal exemption, the flat tax levies a single rate on all taxable income. A low flat-rate tax is simple, fosters efficiency, and encourages compliance. Simplicity means that the taxpayers are able to understand the law and their obligations. Efficiency means that individuals invest on the basis of economic decisions, not tax preferences. Compliance means that the government can collect income tax in an accurate, responsible, fair manner, with a minimum of corruption.
Why is the flat tax good for Croatia? Under current tax law, four rates, 15 percent up to annual taxable income of HRK 36,000, 25 percent on the next HRK 45,000, 35 percent on the next HRK 171,000, and 45 percent on income exceeding HRK 252,000. Given these high rates, it is easy to see why individuals would prefer to earn their income in any of the six countries listed above. Croatia recognizes the need to be competitive with neighboring countries to attract foreign investment by setting the corporate tax rate at 20 percent. This creates undue complexity as individuals, when possible, will seek to incorporate to take advantage of lower rates. It also sends signal to foreign investors that Croatia continues to believe in the confiscatory regime of high tax rates on successful individuals, painting a discouraging picture of the country.
To maximize its economic growth, create jobs, raise incomes, and provide the government with sufficient revenue to finance the essential limited tasks of government, Croatia will have to compete for investment with other Central and Eastern Europe countries. Given the success of the flat tax in countries which have adopted it, and the prospect that others of Croatiaâ€™s neighbors are likely to follow suit in the next few years, Croatia risks being the odd man out, denying its citizens the opportunities for good paying jobs and a higher standard of living. The flat tax has been a positive force in Central and Eastern Europe, and thus deserves serious consideration by the people and government of Croatia.
Dr. Alvin Rabushka is on of the distinguished speakers at the International Leaders Summit scheduled for November 5 and 6 in Sheraton Zagreb Hotel, Zagreb, Croatia. Alvin Rabushka is the David and Joan Traitel Senior Fellow of the Hoover Institution at Stanford University and co-author, with Robert E. Hall, of The Flat Tax, 2nd Edition, Stanford: Hoover Press, 1995. The Flat Tax can be downloaded and printed on line athttp://www-hoover.stanford.edu/PRESSWEBSITE/FlatTax/contents.html
Dr. Rabushka serves on the Founding Advisory Boards of the Adriatic Institute for Public Policy - Croatia's first independent free market think tank and the International Leaders Summit.