Monday, April 25, 2005

The flat-tax revolution – The Economist article

In the April 14 issue of one of my favorite magazines (The economist) there is an interesting article on the current option posed to countries to simplify their tax systems by implementing a flat-tax. The readers of this blog are aware in this regard of the current discussions on reforming the US IRS code (see my post of April 15). The discussion of the pros and cons of a flat-tax is now made under the background that it is time disentangle some of the complications of the tax system and a flat tax maybe (partly) the way to do it.

The first article starts like this: “the more complicated a country's tax system becomes, the easier it is for governments to make it more complicated still, in an accelerating process of proliferating insanity—until, perhaps, a limit of madness is reached and a spasm of radical simplification is demanded.” With regards to the limit of madness, I can say that the “complicator” button pressed by some legislators over tax systems is deriving some investors mad. I remember the A&T CEO saying that his company fills out 39,000 tax forms a year, that's one every three and a half minutes!

With regards to the solution on the horizon, I have my doubts. First what is flat tax? Flat simply means no different brackets applying depending on the amount of income derived. Everybody pays tax at the same rate. Progressivity is achieved through other mechanisms. I remember my face of surprise when an Estonian ex-colleague of mine described the Estonian tax system for the first time. In fact, Estonia became the first country in Europe to have a “flat tax”. This flat-tax “mania” is spreading throughout the eastern European countries and is slowly convincing more and more politicians (and even the US) to take a look at it with sharper attention. What I like is the simplicity, since simple ideas are easier to grasp and easier to administer.
That’s why if you want to be up to date in this discussion you must read the Economist of this week! You can click here to read the first part of the article.
I hope you have a Flat reading!


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