While no government has implemented a pure flat tax, politicians in many OECD countries have recognised the need to reform their personal income tax system over the last two decades. The idea has now caught the attention of some OECD countries, including Italy, Greece and Mexico. Advocates of the flat tax say it has already proven its worth in Russia and other economies in transition, such as the Slovak Republic. But there is a price: a move to a flat tax system strongly affects income distribution. It even stimulates growth, its defenders claim. A flat tax improves the transparency of the income tax, cuts the administrative and compliance costs and, if the rate is low, reduces the temptation to evade tax. Filing is simplified, since gone are most deductions and exemptions. This at least is what proponents of a "flat tax" system predict. Imagine a tax return no longer than a postcard. Could flat taxes be the way forward? The answer is not that simple. But all three face a severe economic contraction due to the unwinding of massive balance of payments deficits caused by a cheap credit binge.There is no clear consensus on what is the ideal personal income tax. The so-called “Baltic tigers” enjoyed among the highest growth rates in Europe in the last decade. Latvia was in the first wave of more than a dozen ex-communist European countries that have implemented a single rate of tax for personal earned income. In hard times, the IMF’s Anne-Marie Gulde concluded in Riga, social cohesion demands that the better-off make a bigger contribution to meeting the costs of the financial crisis. But they have often not lived up to their billing for revenue generation or fairness.
PARIS, July 30 (Reuters) - If the IMF thinks it’s time for Latvia to move away from its flat income tax, that must surely signal some kind of sea change among free-market conservatives.įlat taxes have got the citizens of former Communist east European countries used to the idea of paying tax on income.
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