Posted on 02/10/2008 7:45:53 PM PST by newbie2008
It's never fun to admit failure. But Russia's 13 percent flat tax forces me to confess a certain degree of incompetence. For 10 years, I've been working in Washington to replace our convoluted tax code with a simple and fair flat tax. But as every taxpayer can attest, my efforts have not borne fruit.
Yet in Russia, President Vladimir Putin -- the former head of the Soviet KGB -- implemented a flat tax in 2001. Not only a flat tax, but a flat tax with a 13 percent rate, four percentage points lower than the supposedly "radical" plan espoused by Steve Forbes and former House Majority Leader Dick Armey. And it's been a big success.
Imagine how this makes me feel. I've tried to help reform the tax system in the United States, a nation the rest of the world considers the home of unfettered capitalism and free-market principles. Yet every year, our tax code gets bigger and more complicated. In Russia, by contrast, the flat tax has been in place for more than two years now. And this reform took place in a nation still trying to overcome the legacy of more than 70 years of communist dictatorship.
Remember the saying: "To the victors go the spoils"? It must not be true. We won the Cold War, but Russia gets a flat tax while America is stuck with a Byzantine tax system based on class-warfare ideology.
But perhaps our luck will change. The Russian flat tax has been so successful that even American politicians might learn the right lessons. Let's look at the evidence: Russia's economy has expanded by about 10 percent since it adopted a flat tax. That may not be spectacular, but it's better than the United States, and it's very impressive compared to the
(Excerpt) Read more at heritage.org ...
Who is the Author?
Daniel J. Mitchell, Ph.D.
John Galt
The growth rate has something to do with the fact that Russia is a major oil exporter. They’d probably prosper even more under a 30% flat tax IF Rule of Law were instituted. As of now, as Exxon, Shell or Chevron how safe it is to invest in that country.
Never going to happen here so long as people keep saying, “I made out great this year,” when they get a big tax refund.
The “miracle” couldn’t have anything to do with $90/barrel oil now could it? An isn’t Russia such a wonderful place to live now...
Who is John Galt?
That and believing that a 23% sales tax is ‘fair’.
John Galt from “Atlas Shrugged”.
Ayn Rand fans here on FR
You mean the people who can’t do math?
- Daniel Mitchell is the McKenna fellow in political economy at The Heritage Foundation (www.heritage.org), a Washington-based public policy research institute.
The Heritage Foundation is a conservative organization.
bookmark for later.
“It also appears, conventional wisdom aside, that a low tax rate doesn’t mean less money for government. Over the last two years, inflation-adjusted income tax revenue in Russia has grown 50 percent. Why? Because people are willing to produce more and pay their taxes when the system if fair and tax rates are low — exactly what Ronald Reagan predicted when he triggered America’s economic boom with lower tax rates 20 years ago. Ironically, the former communists in Moscow now understand supply-side economics, yet liberals in Congress are still relying on the politics of hate-and-envy.
Interestingly, the flat tax is just one of several positive reforms enacted by President Putin. Russia also has reduced the corporate rate of tax from 35 percent to 24 percent. (U.S.-based companies still pay 35 percent, the second-highest corporate tax among industrialized nations). Small businesses also get better treatment. The old system with high tax rates has been replaced by a new system where companies can choose either a 6 percent tax on gross revenue or a 15 percent tax on profits.”
Forbes is a big proponent of the flat tax.
How about we watch Russia for a few years and see how this evolves. Oh yeah, we did.
One of the few good proposals of George H.W. Bush was the elimination of mandatory withholding. That would have really opened some eyes, and we would have had a revolt.
It is sad day, when we realize that Russia has better fiscal conservative economic policies, than we do.
I guess you’re not an Ayn Rand fan, eh?
Simplicity
A flat tax taxes all income once at its source. Hall and Rabushka (1995) includes a proposed amendment to the US Revenue Code implementing the variant of the flat tax they advocate.[8] This amendment, only a few pages long, would replace hundreds of pages of statutory language (although it is important to note that much statutory language in taxation statutes is not directed at specifying graduated tax rates; see Conflating concepts in Arguments against below). As it now stands, the USA Revenue Code is over 9 million words long and contains many loopholes, deductions, and exemptions which, advocates of flat taxes claim, render the collection of taxes and the enforcement of tax law complicated and inefficient. It is further argued that current tax law retards economic growth by distorting economic incentives, and by allowing, even encouraging, tax avoidance. With a flat tax, there are fewer incentives to create tax shelters and to engage in other forms of tax avoidance.
Under a pure flat tax without deductions, companies could simply, every period, make a single payment to the government covering the flat tax liabilities of their employees and the taxes owed on their business income.[9] For example, suppose that in a given year, ACME earns a profit of $3 million, pays $2 million in salaries, and spends an added $1 million on other expenses the IRS deems to be taxable income, such as stock options, bonuses, and certain executive privileges. Given a flat rate of 15%, ACME would then owe the IRS (3M + 2M + 1M) x0.15 = $900,000. This payment would, in one fell swoop, settle the tax liabilities of ACME’s employees as well as taxes it owed by being a firm. Most employees throughout the economy would never need to interact with the IRS, as all tax owed on wages, interest, dividends, royalties, etc. would be withheld at the source. The main exceptions would be employees with incomes from personal ventures. The Economist claims that such a system would reduce the number of entities required to file returns from about 130 million individuals, households, and businesses, as at present, to a mere 8 million businesses and self-employed.
This simplicity would remain even if realized capital gains were subject to the flat tax. In that case, the law would require brokers and mutual funds to calculate the realized capital gain on all sales and redemptions. If there were a gain, 15% of the gain would be withheld and sent to the IRS. If there were a loss, the amount would be reported to the IRS, which would offset gains with losses and settle up with taxpayers at the end of the period.
http://en.wikipedia.org/wiki/Flat_tax
If you think so.
Over the years Russian companies have gone to great lengths to avoid this crushing payroll tax burden -- including such measures as under-reporting payroll and paying employees with benefits that would never show up on their payroll (cars, apartments, etc.).
From Wikipedia [en.wikipedia.org/wiki/Income_tax].
In Russia a flat rate of income tax, equal to 13%, is applied. Several types of income, such as lottery winnings, are taxed at 35%. Dividends are taxed at 9%. There is a large list income not subject to taxation.
From http://www.lowtax.net/lowtax/html/offon/russia/rustax.html:
Profits tax is levied on Russian legal entities and foreign legal entities that carry on business activity in Russia through permanent establishments and/or receive income from sources in Russia.
The rate of corporate profits tax in Russia is currently 24%. Of this amount, 6.5% is payable to the central government, 17.5% is payable to the regional government. Regional governments have the power to reduce the regional element by up to 4%, giving a minimum overall rate of 20%.
Capital gains are usually taxed at the corporate profits tax rate of 24%, but some types of gain in the hands of foreign legal entities are taxed at 20%.
From Interfax interview: Russian economic policy likely to remain stable after 2008 elections – German Gref. [http://www.interfax.com/17/239385/interview.aspx]
“The minister suggested that Russia could reduce value-added tax to 15% in 2009 from the current 18%, simultaneously doing away with a privileged VAT rate for certain taxpayers.”
There is no branch remittance tax, but there are withholding taxes as follows:
* Dividends 9% (15% if either the payor or recipient of the dividends is a foreign legal entity);
* Interest 20%; but certain types of state and municipal security attract a rate of only 15%;
* Freight expenses 10%, but only if the payor does not have a Permanent Establishment in Russia;
* Royalties from patents, know-how, etc. 20% (ditto);
* Payments of other Russian source income to foreign companies 20% (ditto)
From 1st January 2007 there is unlimited carry-forward of prior-year losses from the previous 10 years, and a FIFO basis is applied; there is no carry-back. Until 2006, only 30% of current year profits could be sheltered with prior year losses.
There is no tax credit with the domestic 9% dividend tax, but if a Russian legal entity pays the dividend onwards to its own investors, this is untaxed. Thus an RLE deducts dividends received from dividends paid out before calculating tax payable on the balance.
Seems Russia is doing great with the flat tax ... however that is not the only revenue maker for the State.
March 24, 2003This article is nearly five years old.
Russia's Flat-Tax Miracle
by Daniel J. Mitchell, Ph.D.
I think it will be part of this campaign. we shall see...
I’m sure Democrats will agree to a flat tax, as long as there are a few higher brackets (just for the rich), and some exemptions for their friends, and some tax credits for the good of the environment, for abortions, for investments in research on embryos, and tax credits for those who don’t pay any taxes.
I did notice something odd about the time references in this article. I should have checked the dateline.
"President Vladimir Putin . . . implemented a flat tax in 2001."
"In Russia . . . the flat tax has been in place for more than two years now."
The Peoples Republic of China also has a flat tax.
They also allow citizens to invest some of their Social Security funds in approved "market based" instruments - ie: stocks and bonds.
I personally think a combo of the flat tax and the fair tax is optimal. The underground economy, doesn’t pay “income tax”, but will be forced to pay some sort of transaction/sales tax.
Of course, the ideal is to eliminate the underground economy. That would take a lot of changes.
Indeed, perhaps you knew. Your very question is littered throughout the book.
http://www.youtube.com/watch?v=Eg9-D4lg4A0
Here’s the link to the Squidbillies wearing the Flat Tax Hat.
For twelve years you've been asking "Who is John Galt?" This is John Galt speaking. I'm the man who's taken away your victims and thus destroyed your world. You've heard it said that this is an age of moral crisis and that Man's sins are destroying the world. But your chief virtue has been sacrifice, and you've demanded more sacrifices at every disaster. You've sacrificed justice to mercy and happiness to duty. So why should you be afraid of the world around you?
Your world is only the product of your sacrifices. While you were dragging the men who made your happiness possible to your sacrificial altars, I beat you to it. I reached them first and told them about the game you were playing and where it would take them. I explained the consequences of your 'brother-love' morality, which they had been too innocently generous to understand. You won't find them now, when you need them more than ever.
We're on strike against your creed of unearned rewards and unrewarded duties. If you want to know how I made them quit, I told them exactly what I'm telling you tonight. I taught them the morality of Reason -- that it was right to pursue one's own happiness as one's principal goal in life. I don't consider the pleasure of others my goal in life, nor do I consider my pleasure the goal of anyone else's life.
I am a trader. I earn what I get in trade for what I produce. I ask for nothing more or nothing less than what I earn. That is justice. I don't force anyone to trade with me; I only trade for mutual benefit. Force is the great evil that has no place in a rational world. One may never force another human to act against his/her judgment. If you deny a man's right to Reason, you must also deny your right to your own judgment. Yet you have allowed your world to be run by means of force, by men who claim that fear and joy are equal incentives, but that fear and force are more practical.
You've allowed such men to occupy positions of power in your world by preaching that all men are evil from the moment they're born. When men believe this, they see nothing wrong in acting in any way they please. The name of this absurdity is 'original sin'. That's inmpossible. That which is outside the possibility of choice is also outside the province of morality. To call sin that which is outside man's choice is a mockery of justice. To say that men are born with a free will but with a tendency toward evil is ridiculous. If the tendency is one of choice, it doesn't come at birth. If it is not a tendency of choice, then man's will is not free.
And then there's your 'brother-love' morality. Why is it moral to serve others, but not yourself? If enjoyment is a value, why is it moral when experienced by others, but not by you? Why is it immoral to produce something of value and keep it for yourself, when it is moral for others who haven't earned it to accept it? If it's virtuous to give, isn't it then selfish to take?
Your acceptance of the code of selflessness has made you fear the man who has a dollar less than you because it makes you feel that that dollar is rightfully his. You hate the man with a dollar more than you because the dollar he's keeping is rightfully yours. Your code has made it impossible to know when to give and when to grab.
You know that you can't give away everything and starve yourself. You've forced yourselves to live with undeserved, irrational guilt. Is it ever proper to help another man? No, if he demands it as his right or as a duty that you owe him. Yes, if it's your own free choice based on your judgment of the value of that person and his struggle. This country wasn't built by men who sought handouts. In its brilliant youth, this country showed the rest of the world what greatness was possible to Man and what happiness is possible on Earth.
Then it began apologizing for its greatness and began giving away its wealth, feeling guilty for having produced more than ikts neighbors. Twelve years ago, I saw what was wrong with the world and where the battle for Life had to be fought. I saw that the enemy was an inverted morality and that my acceptance of that morality was its only power. I was the first of the men who refused to give up the pursuit of his own happiness in order to serve others.
To those of you who retain some remnant of dignity and the will to live your lives for yourselves, you have the chance to make the same choice. Examine your values and understand that you must choose one side or the other. Any compromise between good and evil only hurts the good and helps the evil.
If you've understood what I've said, stop supporting your destroyers. Don't accept their philosophy. Your destroyers hold you by means of your endurance, your generosity, your innocence, and your love. Don't exhaust yourself to help build the kind of world that you see around you now. In the name of the best within you, don't sacrifice the world to those who will take away your happiness for it.
The world will change when you are ready to pronounce this oath:
I swear by my Life and my love of it that I will never live for the sake of another man,
nor ask another man to live for the sake of mine. Aynn Rand - Atlas Shrugged "The Speech" My question was an allusion to the story. Thanks for posting though.
[The Russian flat tax has been so successful that even American politicians might learn the right lessons.]
Politicians prefer the current tax system. Depending on who is in power, they can alter it to favor or to punish various populations and industries.
Is it not strange that the liberals still are preaching raising taxes and eliminating existing tax cuts.... what planet are these regressive types living on?
Yeah, just what I was thinking.
Kuwait Just dropped the Corporate Tax from 55% to 15% even they want foreign investment!
Yet in Russia, President Vladimir Putin — the former head of the Soviet KGB — implemented a flat tax in 2001.==
Putin was never the head of soviet KGB. Small mistake but very eloquent.
Other thing the flat tax in Russia accually costs sometimes more then the american taxation especcialy on low end of revenues. If one calculate how much will be tax on income say 18000 in Russia and in America will find out then the american tax is lower.
current tax law retards economic growth by distorting economic incentives, and by allowing, even encouraging, tax avoidance.
point
Negative income tax
http://en.wikipedia.org/wiki/Negative_income_tax
Milton Friedman proposed a model in which a specified proportion of unused deductions or allowances would be refunded to the taxpayer. If, for a family of four the amount of allowances came out to $10,000, and the subsidy rate was 50% (the rate recommended by Friedman), and the family earned $6,000, the family would receive $2,000, because it left $4,000 of allowances unused, and therefore qualifies for $2,000, half that amount.
Friedman feared that subsidy rates as high as those would lessen the incentive to obtain employment. He also warned that the negative income tax as an addition to the “ragbag” of welfare and assistance programs, would only worsen the problem of bureaucracy and waste. Instead, he argued, the negative income tax should immediately replace all other welfare and assistance programs on the way to a completely laissez-faire society where all welfare is privately administered.
The negative income tax has come up in one form or another in Congress, but Friedman opposed it because it came packaged with other undesirable elements antithetical to the efficacy of the negative income tax. It must be noted that he preferred to have no income tax at all, but said he did not think it was politically feasible at that time to eliminate it, so he suggested this as a less harmful income tax scheme. Source: Free to Choose.
And when FRANCE is electing better candidates than we are...
And this is in spite of a very healthy spirit of tax avoidance I observed while I spent a month there in the summer of 2006. They'd had 70 years to learn how to work the system, and old habits die hard.
What is the EITC if not a negative income tax?
Spengler at Asia Times makes a good case for Putin to be elected President of the United States. The flat tax was just one of many things Putin has done to save Russia from collapse. The man thinks outside the box, but it helps to have a willing parliament.
The article:
http://www.atimes.com/atimes/Central_Asia/JA08Ag01.html
It is the same. The negative income tax does away with all of the other government wealth redistribution programs.
The elephant in the room is SS/M taxes and benefits.
While it is true that a 10% flat tax on personal income, if all deductions were eliminated, or a 12% NRST “FairTax” without prebate, would bring in the same revenue as all Federal income taxes do today, there would still need to be the 15% tax on wages to pay for SS/M.
A “combo” as you say might be done like this: a 7% NRST which completely replaces all income taxes and SS/M taxes from businesses, plus a 7% flat tax on all individuals’ incomes, plus a 9% flat tax on wage incomes to fund SS/M. If FairTax proponents are right about prices falling 10% under an NRST, then the 7% NRST would bring average prices back up to where they are now, given the mix of imports that would fall much less than 10%. Even so, people with primarily wage income would be paying a total Federal tax rate of 16%, which is much higher than most of them ‘pay’ today because they don’t think of the employer-side of FICA as paid by them.
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