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The World Is Flattening

By INVESTOR'S BUSINESS DAILY | Posted Monday, September 24, 2007 4:20 PM PT

Fiscal Policy: In a free-market revolution sweeping central and eastern Europe, Albania and Bulgaria will become the latest ex-communist states to embrace a low-rate flat tax. To have lived under socialism is to appreciate capitalism.

Related Topics: Business & Regulation | Europe & Central Asia

In America, cutting tax rates is an ideological issue. In the former Soviet satellites of Europe, it is increasingly not an issue at all — so obvious is it that it gives people better lives.

It began with Estonia in 1994, when Mart Laar as prime minister, thinking he was just emulating the capitalist West, made it the world's first nation in modern times to enact a flat tax. A major fiscal crisis resulting from the collapse of the Soviet Union was soon fixed, Estonia was growing at 7% a year and the "Baltic Tiger" was born.

President Bush was mobbed by freedom-loving Albanians during his seven-hour stay in their country on a trip in June.

President Bush was mobbed by freedom-loving Albanians during his seven-hour stay in their country on a trip in June.

Since 1994, Estonia's flax tax rate has decreased steadily from an original 26% to its current 22%. It applies to all personal and corporate income with no deductions.

Far from turning the country into a land where greed ruled, the United Nations Development Program's Human Development Index has reported a rapid improvement in Estonia's health, education, income and environment.

"It seemed common sense to me," Laar recalled of instituting the flat tax, "and, as I thought it had already been done everywhere, I simply introduced it in Estonia, despite warnings from Estonian economists that it could not be done.

"They said it was as impossible as walking on water. We did it: We just walked on the water because we did not know that it was impossible."

Nearby nations soon began getting their feet wet. First, Latvia and Lithuania, both at rates of about 25%. Then Russia in 2001 enacted a flat tax on personal income at 13%; revenues doubled there in less than three years.

Serbia followed in 2003 with a 14% flat rate. Ukraine set its flat tax at 13% in 2004.

Slovakia activated its 19% flat rate the same year. Romania's flat tax was pegged at 16% in 2005.

Georgia outdid them all, passing a 12% flat tax into law on an overwhelming parliamentary vote just before Christmas 2004. Macedonia's flat tax rate, inaugurated this year, is also 12%.

Global legal expert David Storobin considers the flat tax the mark of a New Europe. "Tax reforms in Eastern Europe are having a tremendous effect on Western European economies, as companies are bound to move to neighboring states to avoid paying the near-confiscatory taxation (especially when you combine the income tax with corporate, capital gains and dividend taxes) levied in the 'Old Europe' to support the Welfare State system," Storobin wrote in Global Politician, an online magazine he edits.

It is in the midst of this revolutionary fervor that Albania and Bulgaria will give the go-ahead to a 10% flat tax next year while the Czech Republic will begin enjoying a flat rate of 15% in 2008. Then there's the small nation of Montenegro, which actually plans a 9% flat tax in 2010.

Remarkably, the Bulgarian Socialist Party is the largest bloc in the ruling coalition that is putting the 10% tax in effect. Far and away the most dazzling case historically is Albania, which under four decades of the pure Stalinist rule of Enver Hoxha may have been the most isolated and oppressed country on earth.

In June, throngs of Albanians demonstrated their love of economic freedom when they treated President Bush as a living symbol of liberty, giving him the most ecstatic welcome of all the foreign trips of his presidency.

The results of the flat tax have been astounding. A former economic backwater like Slovakia has seen skyrocketing job growth, a 9% GDP rate last year, the unearthing of its underground economy, and billions in investment from the likes of Hyundai and Sony.

At the 1984 Republican convention in Dallas that renominated Ronald Reagan, GOP politicians were laughed at for wearing large, green "10 Percent Flat Tax" buttons. The idea may have been too radical for America back then (maybe now, too), but that's exactly what is being fervently embraced by people victimized for much of their lives by undiluted Marxist economics.

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