Flat Tax Phooey

Tuesday, April 12, 2005

Flat Tax Phooey

On the Sunday edition of NBC’s “Nightly News,” there was a brief segment in which NBC News shared highlights from a poll of the public’s views on taxes. According to the NBC poll, by 55% to 39% Americans support “a (tax) system like the one we now have, with higher rates for people with higher incomes” over a flat tax.

To discuss the taxpayers poll, the NBC anchorman who was subbing for Brian Williams introduced Maria Bartiromo. (Bartiromo is the host of two business news shows on NBC’s sister network, CNBC.) Asked by the anchorman about the concept of a flat tax, Bartiromo described the flat tax as an approach that “has worked well in other countries.”

To which “other countries” is she referring? She didn’t say.

But Bartiromo’s assessment of flat taxes is unjustifiably rosy. The major sources who support Bartiromo’s statement are AdamSmith.org and Heritage Foundation — institutes with fervently free-market philosophies and which, therefore, can’t be described as distinterested parties. Heritage, for example, attributes growth in the Russian economy to the introduction of a flat tax.

But this expert on Russia contends that significant growth in the country’s economy predates Russia’s creation of a flat tax in 2001:
The Russian economy has grown fast for five years. This growth has been based on high export prices and the price competitiveness created by the 1998 devaluation, but also on the fact that Russian privatised enterprises have reacted to market signals in correct ways. Also essential has been that the consensus in favour of price stability …
What Bartiromo should have said is that there is no consensus on the impact that flat taxes have had where they’ve been enacted. As this article from Yahoo’s British website explains:
Nine eastern European countries, from Estonia in 1994 to Romania and Georgia this year, have been particularly aggressive, setting low, flat rates on personal income and often equally low corporate taxes.

… The clearest benefits are easier administration and a better understanding of tax bills … (Russia) adopted a 13 per cent flat tax in 2001. In 2002, income tax revenues rose by more than 25 per cent in real terms. Many immediately credited the flat tax.

But in January, the International Monetary Fund published research on Russia that did not agree: "Our analysis suggests that the strength of personal income tax in Russia over this period was largely driven by a rise in real wage rates, unrelated to the tax reform."

In Slovakia, where a 19 per cent flat tax was introduced last year, income tax revenues fell 21 per cent. The government covered most of the shortfall with higher excise and sales taxes.

… In eastern Europe, several flat tax countries are, indeed, booming. But the connection to flat income taxes is, as yet, flimsy.

… "The flat tax is … not necessarily good for tax revenues or in the short term for equality," says Ben Slay of the United Nations Development Project in Bratislava.
Bartiromo is surrounded most of her work day on CNBC by stock analysts and other Wall Street types who are big fans of the flat tax. Unfortunately, their enthusiasm seems to have rubbed off on Bartiromo's reporting.

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