Flat taxes do not work

London, October 16:

Flat taxes fail to boost revenues, as their advocates claim, and are likely to be abandoned by the countries that have introduced them, according to research published by the International Monetary Fund (IMF).

“The question is not so much whether more countries will adopt a flat tax, as whether those that have will move away from it,” the study states, after examining the experience of eight economies that have introduced the policy since the mid-Nineties.

Sweeping away variable tax bands and replacing them with a single rate has long been a dream of right-wing economists. Since a number of Eastern European governments introduced flat taxes, support for them has grown in other countries. But the IMF analysts who carried out the research cast doubt on the main advantage claimed for flat taxes: that they increase revenues by allowing people to pocket more of their hard-earned cash, and thus persuade them to work harder.

This is the so-called ‘Laffer effect’ named after US economist Arthur Laffer. But the

authors say, “In no case does there appear to have been a Laffer effect: these reforms have not set off effects strong enough for them to pay for themselves.”

They say one reason for countries such as Latvia and Georgia choosing a flat tax was to announce to investors that they were joining the market economy — “It is hard not to conclude that a key reason for adopting a low-rate flat tax has been as a means of attempting to signal to the rest of the world a fundamental regime change, shifting towards more market-oriented policies.”