Dec

11

Specs, may have something more to add here, but flat tax certainly seems to be riding the wave. Below is an article from The Global Guru entitled ‘How to Profit From the Flat Tax Revolution.’

Steve Forbes is probably the most public advocate of flat tax regimes around. In his book Flat Tax Revolution, Forbes discusses how simple flat tax regimes cut taxes, spur economic growth, and put a stop to a culture of tax loopholes. Forbes recently discussed his ideas at the London Junto — a monthly gathering of leading London investment professionals that I sponsor.

The philosopher Arthur Schopenhauer observed that: “All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident.” The ‘truth’ of the flat tax is self-evident to every country that has adopted it. It’s ironic that it is most ridiculed in developed Western economies. A recent IMF report dismissed the flat tax as “something of a craze,” adding that “the flat tax has been marked more by rhetoric and assertion than by analysis and evidence.”

That’s just bunk. Countries that have implemented flat tax regimes have seen both tax revenues and economic growth rates explode. They also have been home to some of the best performing stock markets in the world.

In the first half of the 19th century, the flat tax was the norm. The first calls for a “heavy progressive or graduated income tax” came from Karl Marx in his 1848 Communist Manifesto. That the majority of countries that have flat tax regimes today are the former Communist countries probably has Karl Marx turning in his grave in Highgate Cemetery here in London.

The contemporary flat tax movement got its start in the mid-1980s with the publication of the book, Flat Tax, by two Stanford and Hoover Institution economists Alvin Rabushka and Robert Hall — the latter my macroeconomic theory professor at the time. Perhaps no economic policy of the last 20 years offers a better example of John Maynard Keynes’ much quoted observation that:

“The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than commonly is understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.”

That the idea of a flat tax could spread from Silicon Valley to Estonia — within a decade, no less — is remarkable. At the time Rabushka and Hall’s book was published, Estonia was still part of the Soviet Union.

“New Europe” has been the pioneer adopting flat taxes. With the exception of Hong Kong, every country in the world adopting the flat tax has come from the fringes of the old continent. Celtic Tiger Ireland was first out of the gates lowering corporate taxes to zero in the 1960s. The result? In less than a generation, Ireland’s per capita GDP now exceeds that of Germany, France and the UK.

The Baltic countries of Estonia, Latvia and Lithuania adopted flat tax regimes in the mid-1990s and have recorded Asian Tiger-like economic growth rates ever since. Russia introduced a flat tax in 2001 and tax revenues doubled. Others like Ukraine followed in 2003, Slovakia in 2004, and Romania in 2005. The tiny Former Yugoslav Republic of Macedonia adopted the flat tax regime only a month ago. The flat tax remains on the agenda in several countries including Costa Rica, the Czech Republic, Mauritius, Mongolia, Poland, Slovenia, Greece and Croatia.

Yet opposition to flat tax regimes in “Old Europe” remains intense. Angela Merkel was forced to back down from her flat tax position to win her post as German Chancellor. Germans associate flat tax regimes with “Amerkanische Verhältnisse” (”American circumstances”) — what they perceive as armies of workers condemned to a life of poorly paid indentured servitude at McDonald’s. In the UK, both the opposition Tories and the Liberal Democrats considered briefly incorporating flat tax policies into their party platforms. Sadly, both have backed away ahead of elections in spring 2007. Ireland’s success raised jealous hackles in the necks of EU bureaucrats. But after the EU forced it to raise taxes in the 1990s, Ireland eventually stood up to EU bullying and cut corporate taxes back to 12.5%.

The bottom line? “Old Europe” will budge only when its hand is forced. When neighboring Slovakia adopted a 19% flat tax in 2003, the Austrian government cut corporate income tax rates first from 50% to 34% and then to 25%. This policy not only kept companies in Austria about to defect across the border, but also attracted new ones. Today, Austria’s economic growth rate is double that of Germany and perhaps explains the presence of 50,000 German guest workers in the country.

But if Slovakia and Austria got it right, neighboring Hungary has gotten it remarkably wrong. Hungary recently raised corporate taxes. The results have been predictable. One entrepreneur I know simply closed his Hungarian company and incorporated in Wyoming over the Internet. If taxes were, say, a flat 19% as in Slovakia, he would not have bothered.

The flat tax is about more than just economic growth. Flat tax countries also have been a terrific place for investors to make money. The Russian stock market has been the best-performing market in the world since it adopted a flat tax of 13%. The Austrian market has been the #1 market in New Europe over the past five years. Turns out making money is about good policy and not geography. I’d invest in “Flat Tax Fund” over an “Asian Tiger Fund” any day. To me, that truth is self-evident.


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