March 21, 2002

March 21, 2002 | Commentary on Taxes

Tax Reform: Russia, 1; United States, 0

Eleven years ago, the Soviet Union was a communist dictatorship, an "evil empire," in the words of President Reagan. But today, the Cold War is a fading memory, and the nation that used to represent international socialism has junked its "progressive" income tax for a simple and fair 13 percent flat tax.

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 down.

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 reformers."

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.        

About the Author

Daniel J. Mitchell, Ph.D. McKenna Senior Fellow in Political Economy

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