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Flat Taxes Are Big in the Former USSR. Have They Worked?

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Posted on Nov 12, 2011
Gage Skidmore (CC-BY)

Republican presidential hopeful Newt Gingrich.

By Braden Goyette

(Page 2)

More than just tax reform

While the 2005 IMF study found that overall tax compliance had improved in Russia — more people were reporting their incomes and paying taxes appropriately — the study also found that this didn’t account for the entire increase in revenue. “The general view among those who have looked closely at the data was that what happened to revenue was a reflection of broader developments to the Russian economy at the time,” Keen said.

An overall increase in wages contributed greatly to increased tax revenue. “Our analysis suggests that the strength of [personal income tax] revenues in Russia over this period was largely driven by an increase in real wage rates unrelated to the reform,” the IMF study said [PDF; see p. 40].

Though proponents of a flat income tax speculate that a lower consistent tax rate would motivate people to work harder, the 2005 IMF study also found that that wasn’t the case in Russia. “Based on what we found and what others have found since, there has been very little effect on actual work effort,” Keen said.

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How do the candidates’ proposals compare?

Cain and Perry’s tax proposals aren’t quite like the ones enacted in Eastern Europe. Former Tax Policy Center Director Len Burman has a helpful FAQ that clarifies this issue:

Yes, so-called “flat taxes” are common on Eastern Europe and Russia, but they’re flat rate income taxes. They include capital income, such as interest, dividends, rents, and royalties in the base as well as wage income. Because high-income taxpayers receive most of the capital income, this makes those flat taxes more progressive than the flat tax periodically proposed in the U.S. (For example, it was the centerpiece of Steve Forbes’ presidential bid. Forbes just endorsed Perry.)

Both Gingrich and Perry are proposing an optional flat income tax — Gingrich’s at 15 percent, Perry’s at 20 — that would allow you to choose between paying the flat rate or paying according to the current system. Creating a two-tiered tax system, Åslund pointed out, wouldn’t exactly simplify the tax code. Perry’s proposed income tax also isn’t totally flat, because it wouldn’t touch some types of income — for instance, investment income.

Cain’s tax plan is flatter — he’s proposing a 9 percent personal tax, a 9 percent business tax and a 9 percent federal sales tax to make up for the decreased revenue. Under current tax law, sales taxes are already levied by the states [PDF], with local taxes coming on top of that. Cain’s plan also would eliminate the Social Security and Medicare payroll taxes. (Cain has expressed interest in privatizing Social Security, and endorsed Paul Ryan’s plan to privatize Medicare.)

It’s also worth noting that sending in tax returns on postcards, as Gingrich and Perry have pledged to make possible, could cause a new set of problems. “In tax affairs, what you want is precision in terms of defining what’s income or what the tax base is and so forth. You can’t do it on a postcard,” Hufbauer said. Leaving out the details, he cautioned, would leave room for poor administration or tax evasion.

What a flat tax would do in the U.S.

Experts say we probably wouldn’t see any immediate spike in personal income-tax revenue if the U.S. were to adopt a flat income tax. Instead, they say, the candidates’ plans probably would lead to plummeting revenue for the first several years.

“Any growth effects, even in the best of circumstances, that’s a five-year proposition,” Hufbauer said. “And how much growth is a matter of debate.”

Analyses from the nonpartisan Tax Policy Center project that Cain and Perry’s plans would both lead to decreased revenue; the center hasn’t yet scrutinized Gingrich’s plan. Of the other two, Perry’s plan would have a greater impact on government coffers, cutting projected revenue by about 27 percent by 2015.

The Tax Policy Center also concluded that Perry and Cain’s plans would mean an increased tax burden on middle- and low-income families. Cain has since modified his plan so those below the poverty line would be exempt from the individual tax. A Tax Policy Center researcher told The Washington Post that poor families would still see a tax increase under the plan, albeit a smaller one.

The Gingrich and Perry plans also include some exemptions and deductions that would make them less regressive. Gingrich’s plan would allot everyone a $12,000 personal deduction, and count charitable donations and homeownership as tax-deductible; Perry’s includes a $12,500 personal deduction, and deductions for “charitable contributions, mortgage interest, state and local taxes, and Social Security benefits.”


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By C.Curtis.Dillon, November 15, 2011 at 2:33 am Link to this comment

Lafayette:

Actually, he started with nothing 12 years ago and built up a very successful business. He’s not an oligarch by any means but just paid cash to build a very expensive house in town. Obviously, the business is doing very well.

We do have a VAT tax but it is applied only to imports. That doesn’t sound too bad until you realize that almost all consumer merchandise is imported. We have very little industry in this country beyond the coal and steel groups plus a few high tech firms that remain from the former USSR. The problem with VAT is that it impacts the poor and middle class mostly. The wealthy can buy their big ticket items outside the country and, like the US, bring them in as ‘used’ thus avoiding the tax. Also, if you have the money, you can easily bribe a custom’s official to overlook the charge or lower the assessed value to some obscenely small value. You can also register the item in a foreign country where taxes are lower and bypass taxes that way too. If you have money, there’s always a way to get around the system which is run for and by the wealthy. In this country, the politicians are the wealthy so there isn’t any need to bribe politicos to do your bidding. The oligarchs all have places in the legislature (which they buy) so that’s not a problem either.

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By Lafayette, November 14, 2011 at 4:45 am Link to this comment

SMIRK, SMIRK

CCD: My friend, the software man, loves the Ukrainian tax system.

Yes, well, of course he does. He’s probably one of the Ukrainian oligarchs who made out like a bandit (sic!) when the Iron Curtain came crashing down.

What did he get his hands on - its steel industry, its coal mining?

Besides, if the Ukraine has a flat tax it is because it is dead easy to collect. None of the ex-Soviet Union satellites have the will to learn how to install and run a sophisticated tax system. For instance, one in which that flat tax applied to Consumption - as in a Value Added Tax.

A VAT along with a real Income Tax with progressive taxes on incomes above four times the national average would change that oligarch smirk on your friend’s face.

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By fort worth accounting firms, November 14, 2011 at 12:22 am Link to this comment
(Unregistered commenter)

I’ll be learning about some of the features as I go along. I hope that it eventually proves easier for you the reader to follow the postings and comments.

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By John, a swimmer, November 13, 2011 at 9:03 pm Link to this comment
(Unregistered commenter)

Today’s truthdig, nothing of use, value or whatever.  Not going to waste my time anymore with truthdig until they start giving real solutions to the world’s major problem of the 1%‘ers controlling the governments.

1. Gingrich helped plan the bombing and invasion of Iraq.  Another puppet politician that knew Iraq had no weapons of mass destruction and nothing to do with 9/11.

Voting for a Republican or Democrat is voting for the status quo, rule by the Dictators and their puppets.

Solution:  Only chance of survival is to change election laws and processes:  multiple parties and candidates to break the strangle hold on election, especially 2012.

2.  Bush-era tax cuts, see:
http://www.cbpp.org/cms/?fa=view&id=3490
The Center on Budget and Policy Priorities, very reputable non-profit organization, used figures, actual and estimated from the US Congressional Budget Office to calculate actual and future costs to taxpayers for the Bush-era Tax Cuts, about 300 to 700 billion a year.  Tired of all the lies.

3. All other problems could be worked on by a new Congress with politicians that represent the 99%‘ers.  Vote out the Republicans and Democrats.

4. The rigged debates are for idiots, nothing but quiz shows with time limits.

5. End US imperialism/war which is a must for the Dictators and their puppets obsessed with money and power.

enough

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By felicity, November 13, 2011 at 11:49 am Link to this comment

Unfortunately, there isn’t a system in existence that
can be applied to any country, in any time frame that
will produce the same outcome as it produced before.

A point - the Depression years saw the GDP growing at
13%/year. During ‘our’ recession, the GDP has been
growing at 2-3%/year. So, applying the same cure-alls
to each Recession makes sense?

And then there are the ‘interesting’ ways GDP’s and
CPI’s etc. are computed. Enter the Rolex watch.  It’s
not as expensive as it should be - according to those
who use its cost in determining the CPI.  In other
words, it sells for far less that it should because
the status etc. one gains by having it on his wrist
should result in its cost being at least triple what
it is.  Therefore, the Rolex is much cheaper than it
should be, thus magically reducing the overall CPI
figure.

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By ardee, November 13, 2011 at 7:07 am Link to this comment

One thing seems certain, our current tax structure is unfair and places far too much of a burden on the middle and working classes. We in the middle or a bit lower pay both income and payroll taxes, factor in sales taxes and we are paying every time we turn around!

Contrast that with the Hedge Fund manager, to cite only one example of inequity, whose income exceeded triple digit millions yet pays only a 15% capital gains tax. This fortunate soul pays neither personal income tax nor payroll taxes. As for sales tax, well, they purchase large ticket items offshore, import them as “used” and wriggle out of that tax as well.

I do not open the can of worms that is corporate taxes as being far to complicated and sickening a topic. Perhaps some economist might endeavor to explain the inequities found there.

“If all the economists were laid end to end they couldn’t reach a conclusion.”
George Bernard Shaw

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By C.Curtis.Dillon, November 13, 2011 at 1:23 am Link to this comment

I’m not an expert on this despite 6 years living in Ukraine. I spent much of last year doing conversational English with a rich software entrepreneur here in Crimea and we often talked about taxes (especially how high the American taxes were because he had a server farm in NJ and had to pay taxes on that part of his income in the US). Ukraine has a flat tax on the first 500,000 grevna (about $62k) of 200 grevna/month. That means, no matter what your income, you pay a flat 200 grevna (about $25) every month. That is, to say the least, regressive in the extreme as it goes from basically confiscatory on the low end to barely a tickle at the top. Above 500K I don’t know what the rates are but everything in this country is biased towards the rich so I can only imagine they are equally low. Ukraine gets much of its income from VAT on imports (20% or so I’m told) plus a 10-20% import duty. This, of course, makes imports exceedingly expensive (and that tax exceedingly regressive). We get most of our clothing from China so we pay even more than in the USA. Same with imported food, furniture and electronics. My friend, the software man, loves the Ukrainian tax system.

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By Lafayette, November 13, 2011 at 12:10 am Link to this comment

Flat Taxes Are Big in the Former USSR. Have They Worked?

Of course they work. The oligarchs are as rich as Croesus. (Even richer ...)

It is not the flat-tax that doesn’t work (anywhere) in Russia, but the whole damn system - from politics to economics and all the rest.

Russia, like all ex-Soviet Union countries and their satellites, belabored far too long under a centralized economic system - which has not changed. Those who own control of the political levers of power, own/run the country.

When the oil runs out, they wont have a friend on this planet. The smart Russian Mafia have all immigrated ... to the US.

The Russian people should revolt and start all over again. A market-economy has taken root, but only for that tiny percentage of Russians with a bit of money.

All the rest are eking out a subsistence-level existence. So, the question as put is ridiculous.

Tax what? The oligarchs? Ya gotta be crazy ... they already pay enough baksheesh to the politicians in power. Putin will never have to work another day of his life.

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By johnr, November 12, 2011 at 9:16 pm Link to this comment
(Unregistered commenter)

I haven’t read the article associated the headline of this piece; my
comment regards the pic of Gingrich, whose face, as depicted in the photo,
seems to be waxing hypertrophic. The peripheral structures of Mr. G’s head
appear to be subsuming his features, swallowing them up, rendering them
small, doll-like (plastic doll’s features working unnaturally, always smiling,
in the middle of a too large orb). It is, undoubtedly, of no significance—-in
fact, I apologize for commenting upon it, upon failing to observe some pithy
point, some more significant observation, but there it is ... the man’s head
seems to be enveloping itself, as if it were preparing to implode.

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By Anarcissie, November 12, 2011 at 8:03 pm Link to this comment

There is not much point in talking about a flat-tax system unless it includes many forms of income, such as capital gains and dividends, which the present proponents seem ready to leave out.  The middle-income voters will do the math, find out they have to pay more, and the issue will be dead until the next pre-election circus.

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