October 8, 2005

The World Is Flat (Tax)

But in the meantime, Germany has decided it can't wait and has announced plans to cut its corporate tax rate to 19% from 25%. During last month's election campaign, the opposition party's candidate for finance minister, Paul Kirchhof, championed a 25% flat tax "so that workers don't need 12 Saturdays but 10 minutes to complete their taxes." Some analysts blame the proposal for the opposition's late collapse in the polls, as incumbent Gerhard Schröder's party fanned fears about the flat tax. But the fact that it was debated at all shows that even Germans realize they are under competitive tax pressure.

And what of the United States? The postcard flat-tax concept was virtually invented on these shores, originally by Mr. Friedman. Americans devised the economically optimal tax system and much of the world seems ready to embrace it -- just not us.

Back in the 1980s, a few Democrats (Bill Bradley, Dick Gephardt) entertained a tax reform of flatter rates and fewer deductions. But nowadays the political left derides the concept as some sinister plot to let Rolls Royce and yacht owners slash their tax bills. Their ideological blinders prevent them from learning the lesson that the new political class in Russia, Estonia and now Greece accept as a 21st-century economic reality: The best way to get more taxes out of rich people is to generate more rich people, and then give them more incentive to report their income by keeping tax rates low.

Russia, for example, has reported that it now gets more tax revenues from the rich from its 13% flat tax than from its pre-existing Swiss cheese tax code with massive evasion and 50%-plus tax rates. Russia's revenues with the flat tax grew in real terms by 28% in 2001, 21% in 2002, and 31% in 2003, according to a recent analysis by the Hoover Institution. If the U.S. had that kind of revenue growth, our politicians would be wringing their hands over what to do with budget surpluses.


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