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August 3, 2004
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The Flat Tax Idea Gains Momentum

by Alvin Rabushka

The adoption and success of the flat tax in a growing number of countries in Central and Eastern Europe, including Estonia, Latvia, Russia, Serbia, Slovakia, and Ukraine, has prompted interest in several other countries around the world.

On July 22, 2004, Hungary's finance minister, Tibor Draskovics, a member of the Socialist Party, stated that he was prepared to examine the possibility of a flat-rate income tax if it did not favor wealthy taxpayers. He made this comment in response to a proposal offered the previous week by his junior liberal coalition party, the Free Democrats, which proposed a 30% optional flat tax on income in place of the current system, which has a top marginal rate of 38%.

On July 26, 2004, the outgoing president of the Barbados International Business Association, George Gleadall, recommended that Barbados scrap its personal income tax system with a top rate of 33% in favor of a 12.5% flat rate on both personal and corporate income. The lower rate would make Barbados more competitive with Ireland's 12.5% and Cyprus's 10% corporate rates. Gleadall indicated that it might be possible to adopt an even lower 7.5% rate. He remarked that "This is the direction the world is going, toward flat tax rates."

The flat tax movement has made its way to Western Europe. The new Spanish government of Prime Minister José Luis Rodríguez Zapatero is known to be considering a flat tax. The June 26thJuly 2nd 2004 issue of The Economist includes a special insert on Spain, which states that Miguel Sebastián, the director of the Economic Office of the Prime Minister, favors a flat tax. A former professor of the Universidad Complutense de Madrid, he has co-authored a paper entitled "A Proposed Reform of Tax System in Spain" with Manuel Díaz-Mendoza, currently serving as an adviser for the tax system in the Prime Minister's Economic Bureau. The paper was completed on February 15, 2004. They recommend the adoption of a 30% flat tax on personal income tax in place of the current complex system, which has a top marginal rate of 45%.

The socialist government of German Chancellor Gerhard Schroder is now reviewing a flat tax. On July 27, 2004, a Finance Ministry twenty-nine member panel of academics, chaired by Professor Wolfgang Wiegard of Regensburg University, head of Germany's independent Sachverstaendigenrat (Council of Economic Advisers), proposed a 30% flat tax on all personal and corporate income. The flat tax would replace the current personal income tax with a top rate of 45% and an effective corporate rate of 38.3% (basic rate of 25% combined with business tax rate of 13.3% payable to the municipality).