What I Learned About Tax Reform From Eastern Europe


I’ve spent most of my life growing up in a suburb of North London, born into a predominately working-class Italian family. We weren’t exactly well off but we did okay. 

My grandparents owned and ran a modest, small-scale Italian restaurant and as a kid, I helped out in what way I could. I learned the ins-and-outs of running a business and I learned first hand how damaging the overreaching hand of the state could be on the private sector.

I think most people, at least once it’s explained, grasp the concept that lower tax rates on businesses generate higher tax revenue. They encourage more investment and offer business a chance to become more competitive (affording them the ability to charge lower prices). 

Here’s something a lot of people miss, the same is true of income tax. Which for small business owners, in particular, behaves like a kind of "double taxation". Cutting income tax is how to write a story of success for the little guy. Calvin Coolidge the former US president cut the income tax for those earning over $100,000 from ‘73 per cent to 24 per cent. Not only did the amount they paid go up by several hundreds of millions but the proportion of the total tax yield as a percentage went up by 35 per cent. 

Under Ronald Reagan the same thing happened, the wealthiest 1 per cent went from paying just 19.5 per cent to today, now paying 40 per cent. 

With the added benefit that consumers now have more disposable income that they can spend spurring further economic growth. But here’s an important caveat it’s not just the rate that matters, an overall simpler tax system is what matters too. A flat tax actually works. In the UK the quasi-official tax guide is a mammoth 20,000 pages long. No single person has read all of it. Even modest business owners like my grandparents have had to hire an accountant, diverting money and resources away from their business. 

The people who hire the most sophisticated accountants who can outsmart the treasury and exploit any loopholes are the richest. But if you lower the tax rate it’s no longer worth their while to pay an accountant upfront, set up domicile overseas or open up an offshore trust. 

So far flat taxes haven’t been tried in any major Western economy in the world. As far as I know, they’ve only been attempted in micro-states or former Soviet territories (e.g. Ukraine, Hungry, Slovakia etc). All of these saw substantial economic growth, with one standout example in particular. Bulgaria saw increased tax revenues after it introduced a flat tax of 10 per cent in 2008, during the financial crises, even when other taxes saw a drop in revenue.

Hungry introduced their flat tax in 2012, increasing revenue by 7.6 per cent in a single year. Russia in 2001 upping revenue seven-fold. Other central and Eastern European countries have followed suit and sailed into prosperity with free-market reforms, Estonia, Latvia, Lithuania, Czechia, Georgia and Serbia.

Fortunately for people like my grandparents, this kind of tax reform is becoming more mainstream. By 2024 Australia is planning to implement an almost flat tax where 94 per cent of people will be in the same tax bracket. 

In my experience, it’s conservatives who are willing to accept the hard empirical evidence on tax reform. So as a liberal I hope for the day that a flat tax is brought into the United Kingdom. Done by an advanced economy like Australia and that could alter the landscape of politics, but done by the worlds fifth largest economy and that could set a standard for the world economy.

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