Flat and Flatter Taxes Continue to Spread Around the Globe

January 16, 2007

By Alvin Rabushka

The flat tax continued to pick up steam in 2006, spreading beyond Central and Eastern Europe.

On February 1, 2006, President Kurmanbek Bakiyev of Kyrgyzstan (Kyrgyz Republic) signed into law modifications in the country’s tax code that established a 10% flat tax. Kyrgyzstan’s flat tax replaced its current corporate tax of 20% and individual income tax rates between 10-20%. Shortly thereafter, the president of neighboring Kazakhstan said that his country would consider a flat tax in 2007.

In late May 2006 the government of Kuwait indicated that it was studying a proposal to introduce income tax at a flat rate of 10%. The draft law is to be studied by the cabinet and, if approved, sent to the country’s parliament for consideration.

In August 2006, Uzbekistan’s parliament adopted its budget for 2007, which provides for several significant tax cuts. The corporate rate will be set at 10% in 2007, down from 12% in 2006. Personal rates will be cut from 20% and 29% to 18% and 25% respectively.

On July 5, 2006, the people of Macedonia voted to establish their own country. The inaugural session of the new parliament met on July 26. President Branko Crvenkovski appointed a new prime minister, Nikola Gruevski, leader of the rightist VMRO-DPMNE, to establish a government. Gruevski announced a 100-point reform program. One of its main pillars is the flat tax. It was set at 12% beginning January 2007, and will be reduced to 10% a year in 2008. The flat tax will replace the current corporate tax of 15% and personal income tax rates between 15-24%. The government stated that the purpose of the low 10% flat tax is to make Macedonia a country with one of the lowest tax rates in Europe in order to emulate the success of Estonia, Latvia, and Lithuania, which experienced strong economic growth after the adoption of their flat taxes.

The tiny island of Mauritius, located in the Indian Ocean about 1,500 miles off the southeast coast of Africa, approved its 2006-2007 budget in July 2006. The signal feature of the budget is the advent, on July 1, 2009, of a 15% flat tax on personal and corporate income. The flat tax will replace the current personal income tax of two rates, 15% on taxable income to 25,000 rupees (about $800) and 25% on the rest. It will eliminate much of the complexity and many of the current deductions and credits in the current system. The 15% flat tax will also replace the existing 25% rate on corporate income.

Poland has moved three-quarters of the way to a flat tax. Apart from the taxation of wages and salaries, which are taxed at three rates of 19% (up to $12,340 annual taxable income), 30% ($12,340-24,680), and 40% (over $24,680), all other income in Poland is subject to a flat 19% rate. This includes corporations, self-employed individuals, capital gains, and dividends.

Montenegro, which achieved independence in a referendum in May 2006, has implemented a corporate tax rate of 9%, reduced from two rates of 15% and 20%, giving it one of the lowest corporate rates in Europe. Montenegro taxes personal income at graduated rates of 16% (€780-2,616 taxable income), 20% (€2,616-4,572), and 24% (over €4,572). It is likely that Montenegro will join its neighbors with an across-the-board flat tax sometime in the near future.

In Bulgaria, the standard rate of corporate income tax was set at 15% in 2006. Effective January 1, 2007, the rate was cut to 10%. Personal income is taxed at three rates of 20% ($1,440-1,500 taxable income), 22 ($1,500-4,800), and 24% (over $4,800).

If it forms a government with a parliamentary majority in 2007, a center-right coalition of three parties—the Civic Democrats (ODS), the Christian Democrats (KDU-CSL), and Greens—plan to enact a flat tax of 17-19% on companies and individuals. The flat tax would replace four brackets for individuals ranging from 12-32% and the corporate 24% tax.

Since January 1, 2007, Iceland taxes all personal income at a flat rate of 35.73%, which consists of the central government’s 22.75% tax rate and the municipal 12.98% tax rate. The central government surtax, levied at 7% during 1998-2003, gradually reduced to 2% in 2006, has now been eliminated. Interest, dividends, capital gains, and rental income are taxed at a 10% flat rate. A wealth tax was abolished at the end of 2005. The corporate tax rate is 18%, down from 30% in 2001. The rate on partnerships is down from 38% in 2001 to 26% in 2007.

On November 29, 2006, Spain promulgated significant changes in its tax laws. Income derived from savings is subject to a flat rate of 18%. Effective January 1, 2007, the company tax rate of 35% was reduced to 32.5%, and will fall further to 30% in 2008. Small and medium-sized companies experienced a drop in their tax rate from 30% to 25%. Personal income is taxed at four rates, with the top bracket cut from 45% to 43%.

Two other developments warrant mention. Guernsey, a British Crown dependency in the Channel Islands off the west coast of France, has had for many years a 20% flat tax on corporate and personal income. On July 10, 2006, its parliament approved a zero corporate tax rate and capped the maximum tax on individuals at £250,000. The cap means that tax rates decline once taxable income exceeds £1,250,000, transforming the territory’s flat tax into a degressive tax.

The Isle of Man, a Crown dependency located in the Irish Sea between Great Britain and Ireland, reduced its corporate tax rate for trading companies from 10% to zero beginning April 5, 2006. Personal income will continue to be taxed at two rates, 10% and 18%, but be capped at £100,000, reducing tax rates on those with incomes exceeding £570,000 a year.