March 24, 2003
By Daniel J. Mitchell, Ph.D.
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
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
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
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
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
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
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
Distributed nationally on the Scripps Howard wire
Russia's Flat Tax Miracle
Daniel J. Mitchell, Ph.D.
McKenna Senior Fellow in Political Economy
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