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March 24, 2003

Russia's Flat Tax Miracle

By

It's never fun to admit failure. But Russia's 13 percent flat tax forces me to confess a certain degree of incompetence. For 10 years, I've been working in Washington to replace our convoluted tax code with a simple and fair flat tax. But as every taxpayer can attest, my efforts have not borne fruit.

Yet in Russia, President Vladimir Putin -- the former head of the Soviet KGB -- implemented a flat tax in 2001. Not only a flat tax, but a flat tax with a 13 percent rate, four percentage points lower than the supposedly "radical" plan espoused by Steve Forbes and former House Majority Leader Dick Armey. And it's been a big success.

Imagine how this makes me feel. I've tried to help reform the tax system in the United States, a nation the rest of the world considers the home of unfettered capitalism and free-market principles. Yet every year, our tax code gets bigger and more complicated. In Russia, by contrast, the flat tax has been in place for more than two years now. And this reform took place in a nation still trying to overcome the legacy of more than 70 years of communist dictatorship.

Remember the saying: "To the victors go the spoils"? It must not be true. We won the Cold War, but Russia gets a flat tax while America is stuck with a Byzantine tax system based on class-warfare ideology.

But perhaps our luck will change. The Russian flat tax has been so successful that even American politicians might learn the right lessons. Let's look at the evidence: Russia's economy has expanded by about 10 percent since it adopted a flat tax. That may not be spectacular, but it's better than the United States, and it's very impressive compared to the anemic growth rates we see elsewhere in Europe.

It also appears, conventional wisdom aside, that a low tax rate doesn't mean less money for government. Over the last two years, inflation-adjusted income tax revenue in Russia has grown 50 percent. Why? Because people are willing to produce more and pay their taxes when the system if fair and tax rates are low -- exactly what Ronald Reagan predicted when he triggered America's economic boom with lower tax rates 20 years ago. Ironically, the former communists in Moscow now understand supply-side economics, yet liberals in Congress are still relying on the politics of hate-and-envy.

Interestingly, the flat tax is just one of several positive reforms enacted by President Putin. Russia also has reduced the corporate rate of tax from 35 percent to 24 percent. (U.S.-based companies still pay 35 percent, the second-highest corporate tax among industrialized nations). Small businesses also get better treatment. The old system with high tax rates has been replaced by a new system where companies can choose either a 6 percent tax on gross revenue or a 15 percent tax on profits.

Of course, President Putin can do more. Russia still needs to privatize inefficient state-run industries. It also would be nice if he supported President Bush in the Middle East; after all, Bush has supported Putin's flat tax. During a state visit in 2001, President Bush said, "I am impressed by the fact that [Putin] 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 success of Russia's flat tax shouldn't surprise anyone. Hong Kong has had a flat tax for a long time, and it's been the world's fastest-growing economy over some 50 years. Indeed, there are growing signs that China may implement a flat tax in the near future. Talk about a man-bites-dog story! One of the few remaining communist nations may get a flat tax before America. At this rate, the United States may wind up in the same category as France, Cuba and North Korea.

To be fair, President Bush is moving America in the right direction. He already has pushed one tax cut through Congress (though most of it has yet to take effect). Now he is urging lawmakers to end the double taxation of dividends and expand IRAs. All of these policies shift us -- slowly but surely -- in the direction of a flat tax.

It would be nice, however, if we got to a flat tax during my lifetime. And even if we implemented the flat tax because we didn't want to fall behind the rest of the world, at least I'll be able to tell myself that my efforts weren't wasted.


- Daniel Mitchell is the McKenna fellow in political economy at The Heritage Foundation (www.heritage.org), a Washington-based public policy research institute.

Distributed nationally on the Scripps Howard wire

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