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4/23/06

EURACTIVE: European Union Taxation - Flat Tax - An opportunity to promote economic growth?

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European Union Taxation - Flat Tax - An opportunity to promote economic growth?

Flat tax' is all the talk in the new European member states these days, and calls for tax cuts and simplification are also coming from elsewhere in Europe. Meanwhile, divisions remain on its merits. Simply put, ‘flat tax’ means that everyone is taxed at just one rate. In such a system, in place of a complex set of income tax brackets, the state declares a threshold above which all parties pay a fixed rate on all their income. This threshold is normally low enough to provide an “incentive” for the citizens to prefer paying to dodging their taxes. Such a system taxes all income once and once only, on its inception. As regards corporate taxes, the idea is similar: one bracket should fit all. Analysts are inclined to point out that while in the first half of the 19th century the flat tax rate was the norm in the industrialising states, the first loud calls for a “heavy progressive or graduated income tax” came from Karl Marx in his 1848 Communist Manifesto. Eventually, however, it was the capitalist part of the world that adopted Marx’s call. Since then, the idea has been resurrected a number of times, with quite a number of countries adopting one version or another of the ‘flat tax regime’. And yet, for all the recurring debates, to date no "major" Western economy has switched over (or back) to a flat-rate income tax regime.

According to popular belief, taxpayers all over the world take some eight billion man-hours each year to fill out their tax returns. The modern-day renaissance of the flat-rate income tax was initiated by Estonia in 1991, followed by Latvia (1994), Lithuania (1994), Russia (2001), Serbia (2003), Ukraine (2003), Slovakia (2003), Georgia (2004) and Romania (2005). Bulgaria, Croatia, Greece and Hungary have also been toying with the idea of jumping on the flat tax bandwagon.

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