March 21, 2002 | Commentary on Taxes
What's more -- in a plot twist even novelist Tom Clancy might
have scoffed at -- the idea came from President Vladimir Putin, a
former head of the KGB.
Who would have thought it -- that America would beat the Soviets to the moon, but Russia would become the first to adopt the ideal free-market tax system? (What's next -- France becomes a military superpower? The Congo wins the Winter Olympics?)
Moreover, the Russian flat tax has proven a smashing success
since it took effect in January 2001. Russia's economy grew by more
than 5 percent last year while most other nations were mired in
recession. Even the Organization for Economic Cooperation and
Development called Russia's flat tax system a "key accomplishment,"
a stunning admission since the Paris-based bureaucracy is infamous
for complaining about the "unfairness" of nations using low tax
rates to lure jobs and capital from high-tax nations.
It also is interesting to note that Russian tax revenues are
skyrocketing even though the tax rate now is now far below the 30
percent top rate of the old system. According to preliminary
figures, inflation-adjusted tax revenues climbed by 28 percent last
year. This proves the class-warfare artists in Washington
completely wrong when they argue that tax revenues would fall and
the rich would get a big tax cut if America adopted such a system.
The Russian experience confirms -- again -- that tax revenues rise
under a flat tax.
In addition to one low rate, Russia's flat tax is much less
biased against savings and investment. Unlike our Internal Revenue
Code, which taxes income once when you earn it and a second time
when you invest it, the Russian flat tax does not double-tax
corporate income or impose a capital gains tax on stocks, bonds and
home sales. And with few exceptions, there is no double-tax on bank
deposit interest. A few warts remain, but Russia's flat tax already
beats America's punitive redistribution-oriented tax code hands
Fortunately, it appears that some U.S. politicians have noticed.
President Bush said last June that he "was so impressed that
[Putin] was able to simplify his tax code in Russia with a flat
tax." Later that year, the president reiterated his support,
stating at a press conference with Putin that "I am impressed by
the fact that he has instituted tax reform -- a flat tax. And as he
pointed out to me, it is one of the lowest tax rates in Europe. He
and I share something in common: We both proudly stand here as tax
The difference between President Bush and President Putin, of
course, is that while Russia enjoys its flat tax, Americans still
have to navigate the hundreds of forms required by all 45,000 pages
of our mind-numbing tax code. But don't blame President Bush. He's
boxed in by tax-cut opponents such as Sens. Tom Daschle, D-S.D.,
and Edward Kennedy, D-Mass. If they're willing to filibuster
against a tiny tax cut in a stimulus bill, it's not hard to imagine
what they would do to stop a flat tax.
In the past, politicians in Congress have said a flat tax is
impractical -- even though jurisdictions such as Hong Kong and
Bermuda enjoyed rapid growth in part because of their flat-tax
systems. When nations such as Estonia, Latvia, and Lithuania
enacted flat tax systems, the special interests claimed these
nations were too small to teach us anything. Now that Russia has a
successful flat tax, what excuse will they use now?
A flat tax will create jobs and boost growth -- improving
America's competitive advantage in the world economy. But tax
reform is not just about a bigger economy. A simple and fair flat
tax also would reduce political corruption and fulfill our
Constitution's promise that all people should be treated equally.
If former communists can make this reform, is it too much to hope
that Congress can do the same thing?
Daniel Mitchell is the McKenna senior fellow in political economy at The Heritage Foundation (www.heritage.org), a Washington-based public policy research institute.
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