Flat-tax movement stirs Europe
In the past year, three more nations have adopted flat rates.
A few years ago, Martin Bruncko studied the flat tax at Harvard University. Today, the 28-year-old is flying to European cities to promote the idea, which he made a reality in his native Slovakia.Skip to next paragraph
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"In theory it was interesting, but we never thought we could do it in practice," says Mr. Bruncko, recalling class discussions at the Kennedy School of Government. "So it was fun to see that you actually can do it."
What flat-tax advocates like Steve Forbes and the Hoover Institution's Alvin Rabushka have been pushing in the United States for decades, Bruncko and a team of Western-educated wunderkinds in this country of 5 million achieved in one year.
Last January, Slovakia became the sixth Eastern European country to adopt a flat tax, which means all income-earners pay the same rate. Since then, Romania and Georgia have followed suit, creating a global proving ground for the concept. In the process, flat-taxers have moved Eastern Europe from a Communist backwater to an investment spring - pressuring its higher-taxed Western neighbors to adapt to the new environment.
US conservatives, meanwhile, hope the experience of flat-tax countries like Slovakia - which the World Bank named top economic reformer last year - will persuade President Bush to implement a flat-tax of his own.
Mr. Bush praised Slovakia's tax-reform efforts during a trip there last month. "I really congratulate ... your government for making wise decisions," he said.
Western Europe feels differently. To support large governments and sizable welfare payouts, many Western European countries impose a triple-tiered tax regime of Value-Added Taxes (VAT), akin to a sales tax, high taxes on corporate revenue, and personal tax rates that can exceed 50 percent. Eastern Europe's cheaper labor market and growing reliance on flat taxes leave Western European economies struggling to compete.
"I believe it is putting some pressure on some of these countries and I think ultimately that pressure comes through competing economies," says Kevin Waddell, vice president and director of the Boston Consulting Group in Poland.
Leaders such as Chancellor Gerhard Schröder say that the Eastern European countries steal business with their low tax rates while at the same time benefiting from European Union (EU) aid.
Last year, former French Finance Minister Nicolas Sarkozy said that if the new states were "rich enough" to introduce a flat tax they wouldn't need EU funds. France and Germany want to harmonize tax rates within the EU, and bring flat-tax rebels under a unified code.
With such heavy budget obligations, countries such as France and Germany reject flat taxes because they wouldn't be able to afford a cut in their tax revenues, says Wolfgang Wiegard, chairman of the German Council of Economic Experts.
Last summer, Mr. Wiegard's council, dubbed the "wise ones" in Germany, recommended that the government introduce a flat tax of 30 percent to replace the country's average rate of 38 percent. Such a system would make Germany "internationally competitive," he said.
The government ignored the advice, preferring Wiegard's alternate recommendation of a system that would tax capital income and labor income differently.
Much of Western Europe has likewise spurned flat-tax proposals, but some nations have chosen to follow, rather than beat, their flat-tax rivals.
Austria, whose neighbors include Slovakia, Hungary, and the Czech Republic, lowered its rates from 50 percent on corporate and personal income to 34 percent this year. Britain, mindful of Ireland, another low-tax haven for companies, and Spain are reportedly mulling over the same. But the prospect that more countries will follow suit is less likely.