Flattening our income tax system?
The news that the French actor, Gerhard Depardieu migrated to Russia after French president Francois Hollande increased the tax rate for the rich to 75% made me read up on the Russian (flat) tax system.
I am by no means an expert on income tax and this column must be seen as my way of trying to stimulate some debate on the topic of flat tax.
Depardieu’s move to Russia means that he will be paying the 13% flat tax rate in Russia rather than the 75% top marginal rate in France.
Russia, as well as a number of former Soviet Union countries and some other countries like Jersey, Guernsey, Mauritius, Madagascar and Saudi Arabia all run a system of flat tax.
Flat tax proposals vary in how they define what is subject to tax. A true flat rate tax is a system where one tax rate is applied to all income with no deductions or exemptions.
When deductions are allowed a “flat tax” is a progressive tax with the special characteristic that above the maximum deduction, the rate on all further income is constant – it’s called marginally flat above that point. The real difference between the true flat tax and marginally flat tax is that the latter simply excludes certain kinds of funds from being defined as income.
Modified flat taxes would allow deductions for very few items, while eliminating the most of existing deductions.
The Russian Federation is considered a prime example of the success of a flat tax. The real revenues from its personal income tax rose by 25.2% in the first year after introducing a flat tax, followed by a 24.6% increase in the second year and a 15.2% increase in the third year.
The main argument for a flat rated tax system is that it is much more simple offering much less opportunity for interpretation and some say it promotes economic growth.
In Namibia we are subject to a progressive income tax system meaning that the more you earn the higher your rate of tax liability will be.
As became clear in the US where Warren Buffet, one of the richest people on the planet, was paying tax at a lower rate than his secretary, such very complicated tax systems are cumbersome and can be legally manipulated.
Currently the USA revenue code contains more than 9 million words! Hong Kong has a 95% tax compliance because its tax code is only four pages long with a 15% flat tax.
Flat tax reforms in mainly countries from the former Soviet Union caught on because a simpler tax system helped to broaden the tax base and improved collection rates. In Russia, for those whose tax rate had dropped from 30 to 13 percent, there was less of an incentive to evade taxes and to lie on their tax returns.
In Namibia we are paying taxes for education, health, safety, emergency services and many more and yet, we have private schools, hospitals and security services to name but a few. This mirror economy is costing the average tax payer a whack of money as the state facilities are not acceptable to most. We are effectively taxed twice on our income.
Could a flat tax revenue system offer compensation? Perhaps.