Flat White

Why not a flat tax?

7 February 2018

8:11 AM

7 February 2018

8:11 AM

Progressive taxation has been the default position of both major parties in Australia for decades, to the point where the mere suggestion of reform reeks of political poison. But should the idea of a ‘flat tax’ really be scary or controversial?

In fact, if international experience and best practice shows us anything, it’s that flat tax systems have been tried and tested and could deliver immense gains to Australia in the form of economic growth, an actual increase in revenue and most importantly, more disposable income in the pockets of the average worker. Conversations about tax policy in Australia usually consist of a ‘tall poppy syndromesque’ toxic discourse about how to squeeze more money from the “rich” who “don’t pay their fair share.” However, Central and Eastern Europe show us that there is a better way which stands to benefit the little guy and society as a whole.

Russia adopted their flat tax of 13 per cent in 2001. Despite concerns that this would favour the richest members of Russian society, the move increased tax collection sevenfold. As Putin would later say, this was invaluable in funding Russia’s social programs and therefore the flat tax came at great benefit for the poorest in Russian society. Economic growth saw a strong boost in the years following, with Russia’s GDP rising by 5.1 per cent in 2001, 4.7 per cent in 2002 and a massive 7.3 per cent in 2003. The average taxpayer was left with more of their hard-earned money to take home and spend on whatever they wanted. A single reform was all it took to deliver the people of Russia more prosperity, higher living standards and even the ability to better care for the disadvantaged in their society. What’s not to love?

Similar benefits were reaped by Hungary, who introduced their flat tax in 2012. This reform raised tax revenue by 7.6 per cent in a year that saw Hungarian GDP declined by 1.6 per cent and put to bed claims that flat taxes reduce tax revenue.  Disposable income and consumption quickly rose since the flat tax effectively cut workers’ personal income tax burdens. This allowed the Hungarian government to increase revenue through their GST and aided Hungary’s recovery from a deep recession. Like Russia, Hungary found itself with greater revenue to fund necessary social programs and increased their disposable income. In the process, they were saved from one of their country’s worst downturns.

Bulgaria saw a similar story with their 10 per cent flat tax, introduced in 2008. Despite the usual concerns from leftist economists in Bulgaria, the flat tax increased government revenues – even during the 2009 economic crisis when other taxes raised less revenue. Like the other examples, Bulgaria also saw a large rise in disposable income due to the resultant economic growth and a reduced tax burden for the average Bulgarian.

These are far from the only countries that have benefited from the flat tax. Estonia, Latvia and Lithuania were once impoverished Soviet satellite states. Today, all three have sailed into prosperity with key free-market reforms that have included flat taxes. A broader range of countries from across Central and Eastern Europe, including the Czech Republic, Georgia and Serbia have also introduced flat income taxes, and Slovakia had a successful one for a period of time.

Massive benefits in investment and job growth following Trump’s American tax cuts show us that Australia too is badly in need of a tax reform conversation that goes beyond class war rhetoric and looks to practical results. Evidence from Central and Eastern Europe show us that a flat tax can deliver the results we are looking for. If nations that have been exposed to years of communist and socialist thinking can embrace a tax system that drives prosperity, increases disposable income and could even generate more revenue for vital programs why can’t we?

Kyle Williams is a Mannkal scholar and research associate with the Australian Taxpayers’ Alliance.

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