Once again, American taxpayers are struggling to complete their tax returns. They will pay accountants and attorneys some $140 billion this year to generate paperwork to accompany their checks to the IRS. The 46,900-page U.S. Tax Code governs the whole process, with enough loopholes to lasso a light breeze.
Too bad this isn’t Russia.
Since January 1, 2001, Russians have enjoyed a 13 percent flat tax. That’s right. The once-Communist superpower now stands to the right of publisher Steve Forbes on taxes. The former GOP presidential contender staunchly advocates a 17 percent flat tax.
“Sometimes philosophical seeds fall on interesting ground,” Forbes says. “After Marxism, which was the philosophical equivalent of the IRS code, something understandable has obvious appeal.”
The old Russian system featured three income-tax rates: 12, 20, and 30 percent. The top rate kicked in at the ruble equivalent of $5,000 in taxable income. In contrast, the U.S. has six tax rates: 10, 15, 27, 30, 35, and 38.6 percent, the last of which takes hold at $307,500 for married couples filing jointly.
Russia’s single-rate tax is reasonable and comprehensible. Most important, the Russian government no longer uses graduated tax brackets to punish those whose incomes improve. Americans should be so lucky.
After just one year, the results of this law already look positive. As Hoover Institution scholar Alvin Rabushka observes in a February 21 analysis for www.russiaeconomy.org, “the 13 percent flat tax has exceeded the expectations of the government in terms of revenue. For the vast majority of taxpayers, its implementation is simple, and no forms need to be filed.” Adjusting for currency fluctuations, Rabushka adds, “real ruble revenues increased about 28 percent.”
This initiative “is establishing the custom of paying taxes in Russia,” senior Duma member Dr. Konstantin Remchukov told me over lunch last fall. “It’s greatly simplified everything.” He says that three years ago, tax revenue equaled 9 to 10 percent of Russian GDP. By last November, that number had grown to 16 percent. This follows the supply-side Laffer Curve: Lower marginal tax rates produce higher revenues as both new and previously concealed economic activities enter the tax base. No wonder Russia’s GDP grew 5 percent in 2001.
“There was a huge, monstrous non-compliance problem with the old system,” says Dr. Richard Vedder, an Ohio University economics professor and board member of the National Taxpayers Union. “People essentially operated in the underground economy. There were a lot of payments in kind where people were not paid in cash but in goods to facilitate tax evasion. That problem, from what I understand, has not totally disappeared but has dramatically declined in the last year or two.”
Beyond the flat tax, President Vladimir Putin has signed legislation to chop the corporate tax from 35 percent to 24 percent, effective last January 1. Putin hurled the double taxation of corporate income onto the ash heap of history. The Kremlin also may offer Russians privately invested social-security accounts, much as President Bush wants for Americans. Thanks to actual and potential reforms, Putin expects the average Russian to “be happy” by 2010.
In two former Soviet socialist republics, meanwhile, flat-rate taxes fuel progress. Since 1994, Estonia has had a flat tax of 26 percent while Latvia has enjoyed a 25 percent flat tax since 1995. Both have stimulated growth and higher revenues.
While ex-Communist states confidently reject progressive taxation, America remains plagued by Marxian class-warfare rhetoric. A May 28, 2000 New York Times editorial praised the Russian flat tax’s promise to reduce “political corruption, removing layers of subsidies in the code that officials like to shower on favored constituents.” However, the previous October 30, Republicans for a U.S. flat tax were “disingenuous, when the basic result would ease the tax burden on the super-rich,” the Gray Old Lady screeched, her dainty fist clenched overhead.
Senate Majority Leader Tom Daschle (D., South Dakota) complained January 4 that Republicans “have one unchanging, unyielding solution that they offer for every problem: tax cuts that go disproportionately to the most affluent.”
Analyzing all this from his dacha in Hell, V. I. Lenin must be stroking his beard in utter bewilderment.
Of course, the country that Lenin once misruled still must do plenty to unravel his legacy. Stronger private property rights, a rule of law and full respect for free speech are sorely needed. But with its 13 percent flat tax, Russia now has a far more impressive export than those interlocking, wooden matrioschka dolls.