Central Europe's tax revolution

"...free-marketeers may now have the last laugh. One of their most cherished policy ideas—the flat tax—is fast gaining ground in Europe. To its proponents, the flat tax is the ultimate in fiscal simplification. If all corporate and personal income is taxed at a single flat rate, that slashes red tape and improves incentives. But flat-tax opponents have always countered that it is unjust not to have higher marginal rates for the rich...

...Estonia...become the first in Europe to introduce a flat tax, of 26%...Latvia and Lithuania, the two other Baltic countries, swiftly followed suit, but nothing much happened for a while after that.

Then in 2001 Russia, facing widespread tax evasion, moved to a flat tax of 13% on personal income. Over the next two years Serbia and Ukraine followed, with rates of 14% and 13%...Georgia, fresh from a democratic revolution, introduced the lowest flat tax yet: 12%.

...the flat-tax experiment that has attracted most attention in the EU has been in Slovakia, where a 19% rate for all personal, corporate and sales taxes was introduced in 2003...Slovakia's fiscal innovation helped to spur foreign investment and economic growth, while actually leading to a slight increase in tax revenues...Romania, which is supposed to join the EU in 2007, has just introduced a flat tax of 16%. The centre-right opposition parties in Poland and the Czech Republic are both now pushing the idea of flat taxes set at 15%.

...the flat-tax movement in Europe will be imitated around the world, rather like the Thatcher-Reagan cuts in income-tax rates and Ireland's cuts in corporate tax.

...the Dutch finance minister...is considering a flat tax for the Netherlands, albeit at the high rate of over 30%...advisers to left-of-centre governments in Spain and Germany have also done serious feasibility studies on flat taxes...

So far, the preferred response of the Germans and French is to press for an EU-wide ban on “fiscal dumping” and to push the EU towards tax harmonisation. The trouble is that EU decisions on tax are taken by unanimity—and there is no way that the Slovaks and others are going to surrender their freedom to set their own taxes.

The Economist, Mar 3rd 2005