Tarry for the Nonce

August 31, 2005

Worker Harder, Not Poorer

Filed under: News — lmwalker @ 3:16 pm

Flat tax rates worked in Estonia:

In 1994 Estonia introduced a flat tax rate of 26%. The flat tax is a system with only one tax rate for all personal income and corporate profits. Almost overnight this led to a phenomenal economic expansion. Contrary to the situation in a tax system with progressive rates, people were no longer punished fiscally if they worked harder . . .

Next year Estonia plans to lower its flat rate to 20%, while the Czech Republic, Poland and Iraq are also considering abolishing their progressive tax rates . . .

When Laar became Prime Minister, inflation in Estonia was over 1,000%, the economy was falling at a rate of 30%, unemployment was over 30%, 95% of the economy was state-owned and 92% of Estonian trade was dependent on Russia. Today, inflation is 2.5%, economic growth is between 6 and 7%, unemployment is low, the government budget is balanced and there is a high level of investment.

I wish there was more buzz about this sort of thing in the United States.

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8 Comments

  1. I know Steve Forbes has been out pushing for this. I sure would like to see that happen here. 😉

    Comment by Dave R. — August 31, 2005 @ 4:14 pm

  2. Milton Friedman rocks!!! No wonder these guys were able to turn things around!

    Comment by Dave R. — August 31, 2005 @ 4:19 pm

  3. I don’t know. As right wing as I am about this stuff, an across the board flat tax is a big switch. An economics teacher friend of mine pointed out that it would actually put a pretty big dent into the cash available to the poverty level class and below. Unless you exempt taxes from below the poverty level but that’s a progressive tax system in itself. In any case, abrupt changes to economic factors cause disruptions and the faster they happen, the less able people are do adapt to them.

    Don’t forget too that Eastern Europe, which is still emerging form communism, is not a very good match to the economy of the US so I wouldn’t get too wrapped up in drawing parallels between them.

    Comment by Mark — August 31, 2005 @ 4:32 pm

  4. I wish there was more buzz about this sort of thing in the United States.

    Where you been? This has been a big deal for quite sometime, and the idea of a national sales tax (replacing an income tax) was reiterated by Hassert during the 2004 election year.

    I am a fiscal conservative, but I’m also a libertarian. I like the idea of no taxes, and replacing them (ie. income tax) w/ a national sales tax. Of course, who would want to pay $10 for a loaf of bread?

    Anyway, that’s what the republican buzz was in ’04. The problem is that there’s a huge corporate tax base whereby the government gets a large chunk of its money (companies typically pay the employer’s share of social security taxes and employer paid federal unemployment (FUTA) taxes). Of course, if we just look at individual income tax, a national sales tax on individuals (as opposed to entities, such as corporations), plus the current capital gains taxes, may be the most prudent way to go. Of course, that means that we’d see prices on things change dramatically.

    The benefit of a flat tax is that everyone pays the same; whereas the current tax structure theoretically helps out the poor by taxing them at a lower % rate and penalizes (yeah, kind of whacky) the rich by taxing them at a higher tax rate. I do like this system, as there’s a number of ways to reduce the total tax payments in a year, such as donating a portion of your income to charities, receiving a credit for business expenses, etc. With a flat tax, there may be an elimination of the write-offs/credits, whereby we may just be setting ourselves up for a much more expensive future (even if its perceived that we have more money).

    Anyway, I say….switch to a sales tax, and get rid of income taxes completely. This way, you no longer penalize the people for working; rather, you penalize those for indulging in things that might require large taxes (houses, cars, boats, trips, etc). Of course, there still is the problem of paying more taxes than the current system, but at least if you don’t need that new Ferrari, you won’t be penalized for buying it.

    Another problem I could see with a federal sales tax is that if something was more popular than something else, the government might either endorse or promote this good over other goods, in order to garner more tax revenue from it (esp. if this was a more expensive, thus higher taxed, good).

    Alcohol, Tobacco, and Firearms (along with tires) come to mind. If you look at most counties, these are the things that are taxed the most on a regional basis. Usually, if its something that either 1. Everyone needs, or 2. Everyone buys it will generally be taxed at a higher rate than things that aren’t as in demand, such as fly swatters.

    As an aside, think of sales tax as a corporate post-sale income tax, as the taxes made on the income from the sale of a good or service, by the company, must be paid to the government (in retail, at least).

    Just wanted throw in my $.02

    Comment by Andrew P. — August 31, 2005 @ 5:17 pm

  5. This is one area where otherwise Democrat Matt is quite a free market capitalist. Though I’d have to think through some of the permutations you guys are mentioning, in general I am a strong supporter of the idea of flat taxes, and I should also mention that it isn’t quite as true here in Cali, but back in Pennsylvania the state also had absolutely no taxes whatsoever on basic foods like milk and bread, because those taxes most dramatically affect those who have the least money, and that’s where I think society as a whole should help to make available as cheaply as possible the most basic essences of living.

    In general, I think the flat tax is a great idea because while in theory a progressive tax system punishes those who earn more (language here strongly reflects peoples’ beliefs, as others would say that it reflects how they should help more), the reality is that progressive tax systems also create strong incentives for people to hide their income, which as we all know is quite the reality. There’s a huge market for tax deducations yes, but people also find ways to hide money from the government, and in general, those who make more also have more means at their disposal, so I think it also encourages dishonesty at the highest levels of society.

    I like the flat tax because I think the system should be as balanced and fair to all Americans as possible, and the tax system presently is essentially a de facto system of class warfare. I don’t think it’s wrong for our society to want to encourage people to succeed financially, because when people succeed financially, other people succeed financially (Jack Welch writes about this extensively in his book Winning). When someone is successful, they buy a house, and they need a real estate agent. They fix it up, so they hire contractors. They buy a car, and a salesman gets a commission, a factory worker gets a job, and a stockholder gets a dividend. In general, it’s a good thing to want to encourage success in society, which the progressive system does not. A flat tax system says that no matter how much you make, this percentage is how much you pay, and I think that’s a good idea.

    Personally, I’ve been thinking a lot lately about how this country’s fiscal policies have radically shifted since the birth of the income tax 100 years ago, because prior to that the federal government received the bulk of its money through heavy tariffs on imported goods. One of the ideas behind the tariff was to develop a strong, robust, and self-sustaining US economy, which, ahem, we really don’t have now.

    I don’t know. More about this later, but I’d be curious to hear what others have to say.

    Comment by Matt — August 31, 2005 @ 7:16 pm

  6. The answer to balancing the budget isn’t imposing trade tariffs which will stifle commerce nor is it imposing taxes which will disproportionately harm the poor. A 15% tax on a $15,000 income means you can’t buy as much food whereas 15% of $100,000 means you can’t buy a spare car. Sentiments about equality of burden and encouraging success will only get you so far. After that you have to consider the disproportionate burden of nominally “equal” taxes.

    Fiscal responsibility is about not spending hundreds of billions for paying farmers not to farm, providing housing to people who have not earned it, and dropping tens of billions into military projects that don’t go anywhere. Cut the federal budget, balance it and cut taxes appropriately and you’ll be doing much better than switching to a different tax system and pissing it all away anyway.

    Flat taxes are like putting a republican bumper sticker over a rust hole.

    Comment by Mark — September 1, 2005 @ 9:29 am

  7. My Two Cents:

    Mark says:
    Don’t forget too that Eastern Europe, which is still emerging form communism, is not a very good match to the economy of the US so I wouldn’t get too wrapped up in drawing parallels between them.

    I like a lot of what Matt had to say on the flat tax system. I am becoming a very big fan of the flat tax system. Not to mention that these guys built this flat tax system based on Milton Friedman’s book, and Milton Friedman was an American, and recommended that America switch to a flat tax system…and he definitely knew what he was talking about! Just for the record, Milton Friedman is consider one of the greatest, if not the greatest economist in our country’s history. And Estonia is not the first country to have turned around it’s economy by listing to Milton Friedman…”Chile’s”…economy, society, government, had totally collapsed! They turned to Milton Friedman for help, and now Chile has become THE most stable and growing economy in all of Central and South America, and has attained a very low crime rate because of it.

    Andy says:
    Anyway, I say….switch to a sales tax, and get rid of income taxes completely. This way, you no longer penalize the people for working; rather, you penalize those for indulging in things that might require large taxes (houses, cars, boats, trips, etc).

    One thing I would like to say is: why does anyone have to be “penalized” for anything?!?! For cry’n-out-loud! I’m getting sick and tried of people telling me how I am to spend my money! This is America…land of the free! It’s nobody’s business, not my neighbors, not the government’s, nobody’s business…who or how I give or spend my money! This applies to everyone- rich and poor! This is not how the founding father’s wanted it to be! AND for good reason. There wasn’t even a federal income tax on private citizens till WWII. It was only started to help pay for the war effort, and was only to be temporary, until the war was paid off. So this idea of federal income tax on private citizens is recent in our country’s history.

    One last comment here on taxes, whenever- whenever- the government has cut taxes on private citizens, it ALWAYS takes in more revenue! This is well known, this is even why JFK cut taxes! He said at the time it was to produce more government revenue! So why do politicians in Washington (typically this more often-than-not, comes from the Democrat’s side) keep saying we need to increase taxes to bring in more federal revenue, when they know quite well that the opposite is true? I purpose to you- “social engineering!” We have had a lot of neo-socialist in our government, whether or not they consciously want to admit it or not, and our society as a whole seems to be moving in this direction, mostly out of ignorance, and that is too bad, because socialism, in any form, always…always infringes on the rights and freedoms of it’s people, and squelches the sprit of man! That is why it has failed every single time it has ever been tried.

    Comment by Dave R. — September 1, 2005 @ 9:31 am

  8. Hi…well, I was refraining from more comments on this. I had a whole diatribe written out, but then thought it was pointless. However, I must say that I am quite disturbed by the spending policies of the Republican congress that we currently have. I mean, whatever happened to conservatives cutting programs, giving tax cuts, conserving money? If I wanted spenders in congress, I would have voted Democrat. So…with that said, I bid you farewell (for now). I am sure it disturbs others as well. I don’t care how the economic engine is running, if we waste tons of money in congress (and build up that spiffy deficit), we’re just asking for problems.

    As for topics similar to this whole tax discussion…what about getting rid of the federal reserve, going back to a gold (or some other form of real wealth, oil perhaps?) standard? That should correct some major imbalances……..

    Comment by Andrew P. — September 4, 2005 @ 11:50 am


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