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Slovakia: Bratislava Adopts A Flat Tax -- Can Its Neighbors Be Far Behind?

Neighboring states will be keeping a close watch on Slovakia, which this week became the latest former communist country to adopt a flat income-tax rate. The Slovaks are hoping it will stimulate the economy and ultimately help it attract foreign investment.

Prague, 29 October 2003 (RFE/RL) -- Slovakia this week joined a growing list of mostly former communist countries in adopting a flat tax on personal incomes.

Yesterday, the Slovak parliament widely approved a measure to introduce a flat 19 percent tax on personal incomes, to start next year. The new flat tax replaces a progressive system that features rates ranging from 10 percent to 38 percent, depending on income. The reform also lowers corporate profit taxes to a fixed 19 percent.

Earlier this year, neighboring Ukraine adopted a 13 percent flat -- or "proportional" -- tax on personal incomes. The Ukrainian plan was modeled on Russia's largely successful flat-tax scheme, approved in 2001. Latvia and Estonia also have a flat income tax.

Slovak Finance Minister Ivan Miklos said after the vote that the tax reform will lead to an improvement in the business climate, economic growth, and an influx of foreign investment. "I am very happy because the tax reform has been approved. Today, we can say that the tax reform is approved, and I believe it will bring us results -- to promote fast, sustainable economic growth, increase the number of jobs, and lead to higher investment levels," he said. "And I am glad that the law had wide support -- not only the support of the coalition deputies, but also some members of the [opposition]."

Flat-tax schemes, in general, have enjoyed far more success in Eastern Europe than in the European Union or the United States -- where flat-tax proponents remain mostly on the political fringe.

Much of this success has to do with high tax-evasion rates in the former communist states. Flat-tax supporters argue that by lowering overall tax rates, more workers are drawn into the system and the temptation to engage in illegal dealings is reduced. They also say flat-tax schemes encourage growth and investment by providing an incentive for work and making the tax system more transparent.

Detractors, for their part, point out the inequities inherent in any flat-tax system, where rich and poor pay the same amount of their income in tax. Flat-tax opponents say that when all taxes in society -- including value-added tax (VAT) and pension contributions -- are considered, flat-tax schemes are sharply regressive. That is, the burden falls disproportionately on poorer people.

For opposition Slovak deputy Ivan Kino, the positives of potentially higher economic growth outweigh the negatives of inequality. "We supported the new law on income tax. Our point of view was that it's better than the previous law. It's definitely more pro-reform," he said. "It supports businesses, as well as individual entrepreneurs, and in that way generates economic growth."

All eyes now are on Slovakia's rivals for investment in Central and Eastern Europe, including Poland, the Czech Republic, Hungary, Romania, and Bulgaria.

Poland's government, earlier this year, said it would consider a flat tax on personal incomes as part of an overall plan to stimulate the country's sluggish economy. No initiatives have yet come forward on personal income taxes, but corporate profits will be subject to a lower flat rate of 19 percent starting on 1 January. Romania, too, is considering a flat tax on incomes, but those plans have been put on hold.

Pressure is possibly keenest in the Czech Republic, which has had great success in luring foreign investment in recent years but is gaining a reputation as a relatively high-tax environment. Income taxes are progressive, with rates ranging from 15 percent to 32 percent. Corporate income taxes, however, have fallen in recent years.

The opposition Civic Democratic Party incorporated a flat tax into its party program for the last elections, but the issue is not yet widely debated.

The only former Eastern bloc country not likely to consider a flat tax is Bulgaria. Krassen Stanchev, the director of the Institute for Market Economics in Sofia, told RFE/RL that any plan to adopt a proportional tax system in Bulgaria is "dead."

"The argument [against a flat tax here] is very common and is based on a special understanding of [the concept of] 'fairness.' [The Finance Ministry] believes that different levels of income -- and different levels of corporate income -- should be treated differently," Stanchev said.

Stanchev said that, in his opinion, this is a shame. He said tax-evasion rates remain high in Bulgaria and that some form of a lower fixed rate -- combined with lowering mandatory pension contributions -- could increase participation in the tax system, and overall tax receipts. "The incentive not to pay [income taxes] is relatively strong, and that [while the legal tax brackets are 20 percent and 29 percent] the actual taxes paid are less than 13 percent per taxpayer," he said.

Steve Forbes, the billionaire U.S. publisher, former presidential candidate, and flat-tax advocate, wrote on his website on 11 August that Slovakia's far-sighted tax policies will propel it into becoming the next Ireland or Hong Kong -- in other words, an area of sustained economic growth.

If flat taxes can do that, the effect will not be lost on Slovakia's neighbors.

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    Mark Baker

    Mark Baker is a freelance journalist and travel writer based in Prague. He has written guidebooks and articles for Lonely Planet, Frommer’s, and Fodor’s, and his articles have also appeared in National Geographic Traveler and The Wall Street Journal, among other publications.