WASHINGTON, DC – With America’s Republican presidential candidates lining up to declare their fealty to a flat tax – a system of personal-income taxation that assesses a single rate for all – opponents have focused on why it is a bad idea to raise taxes on the poor in order to reduce them for the wealthy. But, if a flat tax is such a bad idea, why have so many countries embraced it?
A careful study of these countries – mainly post-communist countries in Eastern Europe and a smattering of tiny micro-states worldwide – suggests that there are three main reasons. First, some countries are so relatively poor and lacking in domestic capital that they opt to drop rates in order to attract foreign investors. Other countries are so small and ineffective at collecting revenue that they cannot afford a progressive tax system. Finally, some countries are so corrupt that they have to offer the wealthy a huge rate cut to get them to pay any taxes at all.
The United States, like other developed countries, does not suffer from any of these conditions (yet), so it is not clear why it needs a flat tax.
The formerly communist countries of Eastern Europe that have adopted a flat tax – including Bulgaria, the Czech Republic, Estonia, Latvia, Lithuania, Macedonia, Romania, Slovakia, and Ukraine, among others – sorely lack investment capital. Whether on the European Union’s doorstep or just inside, they compete for the attention of foreign direct investors, for whom a flat tax provides an important signal: You are welcome, we will not steal your money, and you can keep what you earn.