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Lessons from eastern Europe's flat tax

A theory in the US is reality in Bulgaria and elsewhere in the region. Does it work?

One of the many thousands of socialist built apartment blocks in downtown Sofia, Bulgaria, on Sept. 7, 2006. (Christopher Furlong/Getty Images)

SOFIA, Bulgaria — American economist Alvin Rabushka keeps the flags of about 30 nations— mostly post-communist countries like Bulgaria and Slovakia — in his office at Stanford University's Hoover Institution. They remind him of the bittersweet victories he’s helped achieve since he co-authored “The Flat Tax” in 1985.

For while the United States has yet to scrap its progressive, graduated income tax in favor of a single rate, politicians in Sofia, Bratislava and other eastern European capitals have enthusiastically adopted flat taxes, often to the benefit of their treasuries and, some would argue, their economies.

“The whole thing has kind of taken on a life of its own,” said Rabushka. "I don’t push domestic politicians anymore. My approach is, keep pushing in the world."

Now Rabushka's push is coming full circle. Washington's deficit-driven interventions in the American economy since the 2008 Wall Street meltdown have led some to trumpet eastern Europe’s experience with flat taxes as proof they would work in the U.S. The flat tax, advocates argue, could protect Americans from the massive tax increases the federal government might levy in the future to service the country’s ballooning debt.

"It is rather ironic that former communist countries are moving in a free market direction while America becomes more like Germany or France," said Daniel Mitchell, a senior fellow at the Cato Institute in Washington, D.C.

But it’s not certain that eastern Europe’s success with the flat tax can be replicated in America. Critics said it’s foolish to draw parallels between an advanced economy and those transitioning from centralized control with plenty of room to grow.

And while Americans would welcome a more straightforward tax return, voters have never shown an inclination to allow the affluent to pay the same proportion of their income as everyone else, said tax expert Chuck Marr of the Washington, D.C.-based Center on Budget and Policy Priorities.

“I think conservatives would overstate the relevance,” Marr wrote in an email. “If the U.S. were to move to a flat tax and be revenue neutral, it would be a massive tax increase on middle class people — that is a central reason why it has never gained traction here.”

http://www.globalpost.com/dispatch/commerce/100226/eastern-europe-flat-tax