There is less than a month left before the general elections of 25 September and, given the large advantage of the centre-right in the polls, there is talk of nothing but flat tax, workhorse of the League that the coalition has included in its government program.
Right, wrong? Rate at 15 or 23 percent? Constitutional, unconstitutional? There are many questions about the fixed tax and perhaps, to try to find out a little more, it is worth looking at what happens beyond our borders.
Indeed, in Europe, the so-called flat tax exists only in Eastern countries, many of whom have abandoned it in the last 20 years to raise tax revenues and improve equity.
The latest edition of theCPI Observatory has analyzed this tax system, trying to understand why Eastern European countries have decided to adopt it, but also why many have decided to eliminate it.
Which countries use the flat tax?
To date they are eight European countries (out of 43) that use the fixed rate as personal income tax:
- Russia: 13%,
- Estonia: 20%,
- Romania: 10%,
- Bosnia and Herzegovina: 10%,
- Belarus: 13%,
- Bulgaria: 10%;
- Ukraine: 18%;
- Hungary: 15%.
Of these, only Hungary and Bulgaria do not have a tax-free area.
Which countries have abandoned the flat tax?
On the other hand, 7 countries have decided to pass over the years from a single rate to two or three rates in order to guarantee greater tax revenue and to launch a more equitable system.
- Serbia: from a flat tax of 14% to 3 rates of 10-20-25%,
- Slovakia: from the flat tax at 19% to 2 rates of 19 and 25%,
- Czech Republic: from a fixed 15% to two rates of 15 and 23%;
- Albania from a flat tax of 10% to 2 rates of 13 and 23%;
- Latvia from 25% fixed to 3 rates of 20, 23, and 31 percent
- Lithuania from a flat tax of 15% to 3 rates of 15, 20, 32 per cent;
- Macedonia (from 1 January 2023): from a flat tax of 10% to two rates of 10 and 18%.
Flat Tax: why it was introduced
Proponents of the flat tax advocate its introduction for three reasons: according to them it is simple and transparent, reduces tax distortions and contributes to the growth of gross domestic product. But why did it spread in Eastern countries?
"After fall of the communist regimes, the Eastern countries (both those that were formerly formally independent and those that arose from the disintegration of the USSR) had to create their own tax and customs administrations almost from scratch. In these countries there was no real tax system given that the vast majority of the population was employed in the public sector and the enterprises were state-owned. Also in all these countries the shadow economy it was around 30-40 percent both in terms of employment and GDP. There was therefore a very strong need to create tax systems compatible with a market economy and to do it very quickly”. These are the reasons that prompted, according to the CPI Observatory, many Eastern countries to adopt the flat tax.
Basically: they needed to adopt a tax system and do it quickly. The solution was to draw inspiration from the USSR which, before the disintegration, had the value added tax as its only tax. Before long, except for the Russian Federation, all the newly independent countries adopted the flat tax or a two-tier system.
Flat tax: why it was abandoned
Let's go back to today. Although flat tax proponents argue, as mentioned, that this tax system contributes to growth, "the majority of empirical studies provide not encouraging results on the impact that the flat tax would have on economic growth”, explains the CPI Observatory, adding that there are not even indications that it is really able to finance itself.
"These aspects would partly explain why seven countries have decided to abandon the single rate since 2010".
It should also be noted that, with the exception of Albania, in all countries where the flat tax has been eliminated, the rate previously used has become that of the first echelon, while for the following brackets the rate has been increased.
“Among the Eastern European countries which have not abandoned the flat tax and which apparently have obtained the best results is the Russia", explains the article by Francesco Scinetti. In Moscow, the single tax rate of 13% came into effect in 2001, accompanied by an expansion of the no-tax area. What happened? In the same year and in the following two, revenues increased net of inflation by 26, 21 and 12% respectively against increases in GDP which, although very high, were considerably lower (5%; 4,7 and 7,3 ,XNUMX).
According to the Monetary Fundfinally, "the introduction of a flat tax does not have significant effects on the supply of labor and in general on aggregate growth and therefore we cannot expect the reform to finance itself".
