Europe steps up rates of change

Australian, The (Australia) - Wednesday, August 31, 2005
Author: Emma-Kate Symons, MATP
A growing number of nations are opting for flat tax regimes, writes Emma-Kate Symons in Paris

THE flat tax revolution is sweeping across Europe, driven by the economic dynamism of the former communist eastern bloc and a surprise shift towards Thatcherite reforms in even heavily regulated ``Old Europe'' nations such as Germany.

While Australia debates a push for a 35 per cent flat tax , 11 European nations -- including Poland, Hungary and the Czech Republic -- already have flat tax regimes. Their economies are booming as capital and high-income earners flock to the new business-friendly tax havens.

A 25 per cent common tax rate is also on the cards in Greece, with the Prime Minister expected to announce reforms aimed at reviving the sluggish economy within weeks. Estonia, one of the new breed of eight eastern European nations that joined the EU last year, now has a 24 per cent flat tax rate and is contemplating lowering it to 20 per cent.

EU economic dinosaur Germany, groaning under the weight of high unemployment and low growth, is toying with the notion of a common rate of income tax . The flat tax would replace the old system of tiered tax rates and abolishes deductions and other loopholes.

Angela Merkel, the leader of Germany's opposition Christian Democratic party who grew up in the communist former East Germany, is expected to oust Social Democrat Chancellor Gerhard Schroeder in the September 18 election.

She has appointed flat tax zealot Paul Kirchhof as her economic adviser, a move seen by political and economic experts as a sign of the coming revolution .

Mr Kirchhof, a former judge and member of Deutsche Bank's supervisory board, advocates all Germans paying income tax of 25c in the euro. The radical policy has won popular appeal despite the outrage of the divided German Left and strong reservations even within Ms Merkel's conservative party.

Russia has a 13 per cent tax rate and China is also contemplating the possibility of a flat tax .

But Britain, home to what the French like to call Anglo-Saxon ``ultraliberal'' capitalism, risks being left behind in the rush.

Chancellor Gordon Brown, a proponent of tax credits for low-income earners, has rejected the idea, despite a leaked Treasury document this month suggesting the move has economic merit.

The paper, obtained under freedom of information laws, argues that the flat tax model would lead to an ``overall increase in tax revenue''.

This would ``enable a cut in average taxes and spur further reductions in tax avoidance and evasion ... creating a mini economic boom''.

However, Treasury cautioned that the regime would be costly, because ``such a system is tough on the low-paid unless you spend a lot of money on generous personal allowances or a very low rate of tax -- or both''.

Public spending in Britain has risen sharply under Mr Brown's watch while Italy, Sweden, Denmark , and Spain have been cutting back on state spending.

Writing in London's Daily Telegraph, commentator George Trefgarne said: ``The revolution is being driven not by the loathing of communism or some ancient regime, but by that mysterious magic of markets: competition''. A flat tax regime has been adopted in 11 countries and counting. As each citadel falls, another is forced to respond to the new-found vigour of its neighbour.''

Commenting on British resistance to the flat tax in the Financial Times, Corin Taylor, an economist at independent think tank Reform, said ``there is a sense that a huge opportunity has been missed''.