<html> <head><style type ="text/css">body { font-family: "Bloomberg Prop Unicode I", Verdana, sans-serif; font-size:125%; letter-spacing: -0.3pt; color: #FF9F0F; background-color: #000000; text-align: left; } p {line-height: 1.25em; max-width:900px; width:expression(document.body.clientWidth > 900? "900px": "auto" );} h1, h2, h3 { text-align: left; font-weight: normal; color: #FFFFFF; } h1 { font-size: 130%; } h2 { font-size: 115%; } h3 { font-size: 100%; } #bb-style { font-size: 90%; max-width:900px; width:expression(document.body.clientWidth > 900? "900px": "auto" ); } b, strong { font-weight: bold; } i, em { color: #FEC54A; } pre { font-family: "Andale Mono", "Monaco", "Lucida Console"; letter-spacing: -0.3pt; line-height: 1.25em; } table { border: 0; font-size: 90%; width: 100%; margin-left: auto; margin-right: auto; } td, tr { text-align: left; } td.numeric { text-align: right; } a:link { color:#53B2F5; text-decoration: none; } a:visited {color:#53B2F5} a:active {color:#53B2F5} a:hover {color:#53B2F5} </style> </head> <body> <p>By Joseph J. Thorndike</p><p>What sort of taxes should follow a revolution? Flat ones, if the history of Russia and Eastern Europe is any guide. After the fall of communism, nations of the former Soviet empire flocked to the flat tax. Estonia led the way in 1994, followed quickly by Latvia and Lithuania. Russia itself adopted one in 2001, and other countries followed.</p>&#xD; <p>Today, more than 30 jurisdictions rely on a flat tax of some sort, including most of the former Eastern bloc.</p>&#xD; <p>Should new governments emerging from the Arab Spring take a lesson? Not without some careful thought. After all, the flat tax isn't a discreet revenue tool ready for transplant from one nation to the next. Rather, the term describes a general approach to fiscal reform -- one particularly suited to the hurdles facing post-revolutionary states.</p>&#xD; <p>The flat taxes imposed around the globe differ from one another in various ways. Some feature low rates, others high ones. Some are imposed on income, others on consumption. Most important, each operates in a different fiscal context, coexisting with a range of companion taxes that vary widely from one country to the next.</p>&#xD; <p>Grouping these disparate levies under the rubric of a "Flat Tax Revolution" imposes narrative simplicity on a complicated reality. It can obscure the way in which successful taxes arise organically from their political and economic environments.</p>&#xD; <p>Flat taxes swept post-Soviet Europe because they promised solutions to specific problems. They were designed, in particular, to attract foreign investment. "The spread of the flat tax was contagious," wrote economist Alvin Rabushka, a leading champion of the concept, "as one country after another enacted flat taxes to maintain competitiveness with neighboring countries to attract both foreign and domestic investment."</p>&#xD; <p>Flat taxes also flourished because they promised to compensate for anemic state capacity. Post-revolutionary governments typically have underdeveloped bureaucratic institutions, making it hard to collect any sort of tax. That puts a premium on simplicity, and flat taxes promised to deliver exactly that.</p>&#xD; <p>Is the flat tax suited to the Arab world? For some countries, such as Egypt, it probably isn't necessary. With a relatively strong tradition of civil society and functional public institutions, the nation has more latitude in designing its post-revolution revenue regime. (Although competitive pressure for foreign investment might drive Egypt to a flat tax anyway.)</p>&#xD; <p>Other countries, such as a post-Qaddafi Libya, might find the flat tax hard to resist. With deeply corrupt public institutions and a dysfunctional private sector, the nation could benefit from the relative simplicity of a flat tax.</p>&#xD; <p>Notably, even Libya's existing rulers came to that conclusion, albeit in a different context. "It is hard work reinventing a country," Muammar Qaddafi&#x2019;s son, Seif al-Islam el-Qaddafi, told the New York Times last year. "But that is what we are doing. We will have a new constitution, new laws, a commercial and business code and now a flat tax of 15 percent."</p>&#xD; <p>To contact the author of this post: Joseph J. Thorndike at <a href="mailto:jthorndike@thorndike.com">jthorndike@thorndike.com</a></p>&#xD; <p>To contact the editor responsible for this post: Timothy Lavin at <a href="mailto:tlavin1@bloomberg.net">tlavin1@bloomberg.net</a></p> </body> </html>