April 14, 2005
By Daniel J. Mitchell, Ph.D.
If anything's likely to boost support for the
flat tax, it's the annual nightmare of tax season.
Imagine junking all the paperwork the current system requires and
replacing it with two simple postcard-sized forms that tax income
only once and at one low rate. Imagine a simple and fair tax system
that required all Americans to play by the same rules, regardless
of how many lawyers and accountants they had on the payroll. And
imagine politicians having no ability to put loopholes in the tax
code in exchange for campaign cash.
These are all strong arguments for the flat tax. But there's an
even bigger reason to support it: It would be good for the
Globalization has dramatically increased the importance of good
economic policy. Investment funds now have almost unlimited ability
to cross national borders. Jobs and capital are fleeing high-tax
welfare states for low-tax jurisdictions.
This means the rewards for good economic policy are greater than
ever. By the same token, though, the penalties for misguided
class-warfare policies are greater than ever. In other words,
international competition has made tax policy much more important.
Nations have to compete with each other if they want faster growth
and better jobs.
Other countries certainly seem to realize the importance of "tax
competition." Eight nations in Eastern Europe have adopted flat
taxes, for instance, including a 13 percent flat tax in Russia. Two
of the countries, Romania and Georgia, adopted the flat tax this
January, and Poland just announced that it will be hopping on the
All of these former Soviet-Bloc countries recognized that it was
very difficult to overcome the legacy of communism while burdened
with high tax rates and discriminatory taxes on saving and
investment. Leaders from these nations understand that a flat tax
draws job-creating capital. They understand that a low tax rate
rewards productive activity.
Other nations have cut tax rates deeply. Ireland doesn't have a
flat tax, but it has slashed its corporate tax rate from 50 percent
to 12.5 percent. Combined with other tax cuts, this helped turn the
"Sick Man of Europe" into the "Celtic Tiger." Unemployment has
dropped from 17 percent to 5 percent, and Ireland is now the
second-richest nation in the European Union.
Tax competition has forced other European nations to cut their
corporate tax rates. Indeed, there has been so much progress that
every nation in Europe now has a lower corporate tax rate than
America -- even socialist countries such as France and
America needs to regain its status as a major contender in the
tax-competition battle. If we want to remain the world's strongest
economy, we can't rest on our laurels. Yes, the Reagan tax cuts
resuscitated the U.S. economy in the 1980s. And yes, the Bush tax
cuts are helping America grow faster and create more jobs than most
other industrialized nations.
But growing faster than France and Germany is nothing to brag
about. And besides, America needs to watch developing nations such
as China and India. These countries are shifting toward free-market
policies and are attracting jobs and investment. It's even rumored
that China may adopt a flat tax. If that happens, America will face
even more vigorous competition. Hong Kong has enjoyed incredible
prosperity with a flat tax, so just imagine if the rest of China
gets the same simple, pro-growth tax system!
President Bush has appointed a Tax Reform Advisory Panel, which has
been holding hearings and learning how the tax system undermines
U.S. competitiveness. Members are expected to issue a report on
July 31 and almost certainly will recommend that America move in
the direction of a flat tax. Hopefully, they will be bold and
suggest that the entire tax code be junked.
Tax competition is causing a global shift toward better tax policy.
Fifteen years ago, people would have called you crazy if you
predicted the Soviet Union would disappear and that a bunch of
communist countries would have a flat tax. Twenty years ago, people
would have laughed if you said that Ireland would have a 12.5
percent flat tax and be the fastest-growing economy in
More and more nations understand the critical importance of good
tax policy, and the United States should join them. A flat tax
would improve America's economy dramatically and serve as an
example for the rest of the world. Not bad -- especially for a
reform that would make our lives easier.
Mitchell is McKenna senior fellow in political economy
at The Heritage Foundation.
Distributed nationally on the Knight-Rider Tribune wire
If anything's likely to boost support for the flat tax, it's the annual nightmare of tax season.
Daniel J. Mitchell, Ph.D.
McKenna Senior Fellow in Political Economy
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