Flat Tax Revolution in Central Europe Term Paper

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Flat Tax Revolution in Central Europe

Backgrounder:

Flat Tax is type of taxation structure where everybody is taxed uniformly at a single rate. Under such a system, in place of a multiple and intricate income tax slabs, the state stipulates a ceiling, exceeding which everyone pays a fixed rate on all their income. With a view to encourage tax payment instead of tax evasion, the ceiling limit is fixed low enough which provides an incentive for the citizens to pay tax. Under the Flat Tax system, there is a single taxation on its inception. In respect of corporate tax, the concept is also similar where there is a similar structure for everybody. Several countries have adopted Flat Tax is a phased manner starting with Estonia in 1991, Latvia in 1994, Lithuania in 1994, Russia in 2001, Serbia in 2003, Ukraine in 2003, Slovakia in 2003, Georgia in 2004 and very recently Romania in 2005. Even though Flat Tax is not hyped as the cure-all for every economic problem, more and more European nation and out of them a few nations who have recently joined the EU fold have introduced or are preparing for a single tax structure. (Flat tax: www.euractiv.com)

The problem for most of these countries is that there is a high level of budget deficit and many countries are confronted with the necessity to align their economic position with the Eurozone's needs. The merits of Flat Tax are to (i) help in the reduction of bureaucratic tardiness and its connected problems and uncertainty. (ii) Lower the problem of inequity by fixation of an identical rate for everybody (iii) offset tax evasion and corruption. (iv) Provide drive to work, save & invest (v) yield increased revenue by way of taxes and therefore (v) kick-start an economic boom in a small scale. On the other hand, criticism leveled against Flat Tax are that it (i) eliminates almost every types of tax exemption and allowances (ii) unprogressive so far as the 'marginal rates' (iii) skewed in favor of the rich at the cost of the poor (iv) supportive of the people who receives dividend as profits are taxed at source only indicating that Flat Tax is a consumption-based tax. (Flat tax: www.euractiv.com)

Burning Issues:

It is debatable if the apparently popular changeover to a Flat Tax system is propelled by a sound fiscal policy or it is one more ploy by the state authorities to make the taxpayers dish out more to fill the Government's treasury. One important decision by several research professionals is that the competence and success of a Flat Tax system is intrinsically dependent on the real rate of the tax rate which means the lower the tax; the more efficient it tends to be. Specialists' even point out to the fact that a nation's level of competitiveness is determined by several other factors apart from the tax system or the nature of support the nation renders to fresh investments. Whereas it is a fact that a lower tax rate system leave more money for circulation and therefore to be invested in an economy, and flat tax rates normally increase the eagerness of the citizens to deposit their taxes, lower rates of taxes also implies lower tax revenues, which in turn may be unfavorable for the particular state's budgetary position. (Flat tax: www.euractiv.com)

Moreover, many leaders of the Europe's well performing economies like German Chancellor Gerhard Schroder and Prime Minister of Sweden Goran Persson have stated that transition economies of Eastern Europe can manage to lower taxes not least since any revenue loss is more than offset by heavy subsidies from the EU. This disagreement has continually been countered by those 'transition' states that are affected. In the meantime, Germany, as also Italy, Austria, Finland, Denmark & Greece have too decided to effect tax cuts in various categories so as to improve investment and spending and encourage growth. According to Wolfgang Wiegard, adviser to the German government, suggestion for a flat rate of income as well as corporate tax would increase investment in Europe's biggest economy. In keeping with the proposal, Germany must administer a flat tax rate of 30% on all personal and corporate income. Wiegard had observed that majority of the older members of the panel support the flat tax, as against the younger economists who are in favor of the dual income tax.

Prime Minister of the Czech Republic, Stanislav Gross agrees to a simplified tax system. But at the same time while declaring that the growth rate of his country is double compared to the average of the eurozone, he also announced that his administration will not launch a flat tax regime. There can be no end to the debate. Everybody has their figures ready depicting that government revenue rising with the fall in taxes. Nevertheless, this debate need not have to be shown in charts or tested exclusively in lecture halls, stated by Bloomberg columnist Matthew Lynn. Flat Tax has been introduced in many erstwhile communist countries for the last few years and until now, the proof shows they are delivering. (Flat tax: www.euractiv.com)

Flat Tax in Czech Republic:-

Currently the rates of corporate tax in the Czech Republic are 26% which puts a lot of pressure. Hence, it is crucial that the Czech Republic needs tax reform or Slovakia will race ahead of Czech Republic for procurement of business investment. This particular intra-regional tax war shows the competition to investment is ahead of South-East Europe, but the economy of Czech is much at a matured level compared to Bulgaria and Romania which are at the learning stage. The Czech Republic is capable of drawing a considerable amount of investment in the absence of drastic economic or legal reforms. There are reasons behind the nation having a more matured market compared to those in the southern Europe. Even though tax is one of the factor in drawing business, matters like geographic location, quality of life and laws relating to employment also impact where a company establishes a regional headquarters. The progress of the Central and Eastern Europe -- CEE accession states into mature markets implies that they can deal with intricate transactions and complicated legal structure, discarding the fallacy that the nations are in the initial phases of legal development akin to those in southeast Europe. (Slash and Earn)

On the other hand, Estonia began with the Flat Tax system in 2004 with an initial rate of 24%. However the achievement has been good. The efficiency of the companies is rising, the performance of the economy rises at a quicker speed compared to the Czech Republic and the administrative load that comes with filing the tax returns has been lowered and the discipline regarding payment of taxes has bettered. It is important to note that Slovakia exceeds the Czech Republic and imposes a 19% Flat Tax rate. According to Slovak Finance Minister who described the public finance system, taking into account the helpful aspects and benefits for Slovakia launched by the widespread reforms. Currently, the tax liability in Slovakia is the third lowest within the EU member nations; the decrease of this tax load has been the greatest among all the EU nations during the last eight years. Latvia who has introduced the Flat Tax regime is a nation that boasts of one of the lowest tax burdens within the EU. Moreover, it has also established the practicality that launching of the Flat Tax does not always indicate a collapse of the budgetary income of the state. (Mirek Topolanek joined by ODS foreign partners supporting the introduction of a flat tax in the Czech Republic)

The Present Tax regime in Czech republic:

Income Tax rates in the Czech Republic are nearly average for the EU. The rate of Corporate Tax is presently 28% which is going to be reduced to 24% by the year 2006, whereas personal income tax ranges within 15 & 32%. Till recently, the Czech Govt. headed by left of centre Social Democrats appeared quite content with the situation, however presently, with the possibility if the Czech Republic approving the Euro in nearly five years time, the government is starting to implement more and more radical reforms. The Opposition Civic Democrats have been charging the Govt for extremely high rate of taxation since a long phase. At one point of time their MPs Vlastimil Tlusty referred that, they have been advocating a "flat tax" rate of 15% which would be imposed not considering income, and a flat Value Added Tax would also be present. However, flat tax is rational, and because of deductions, it will be easier in case of individuals with lower incomes. Currently, the Czech Republic various rates of income tax rates are present starting with 15% which is the lowest one. In case the lower tax rate is implemented, it would imply that it will be implemented in the lowest level. Any nature of tax cuts is widely greeted by the experts of the economy. Considering both…

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