Flat-Tax Societies

Is believing in the flat tax--termed "truly nutty" by Lamar "This Shirt Was Made For Walkin'" Alexander during the last presidential election season--the public policy equivalent of believing the earth is flat? As a recent study by Gregory Fossedal and Merrick Carey of the Alexis DeTocqueville Institution points out, most opponents of flat tax proposals characterize such plans as "exotic-risky-kooky gamble[s]."

In an international comparison of personal income, capital gains, and corporate profit tax rates, Fossedal and Carey point out something else, too: Flat tax schemes "are the single most common arrangement in…[the] tax codes studied." The authors looked at tax policies in 86 countries and found that 80 percent of corporate income tax codes are flat (at an average rate of 30.5 percent) and that about half of capital gains codes are flat (with an average rate of 28.2 percent).

Personal income rates were the exception to the rule: Only 12 out of 86 countries charged flat taxes on wages and personal income; half apply "steeply progressive codes," with effective top rates of 50 percent to 90 percent. The average top personal income rate for all countries was 42.8 percent. Fossedal and Carey also note that, on average and in constant dollars per capita, GDP in countries with "flat personal income tax[es]" grew at 2.1 percent annually over the past 15 years, versus 1.1 percent for all countries. Developing nations with flat personal income taxes averaged 2.7 percent annual growth over the same period, compared with 0.7 percent for developing nations as a whole.

Similarly, the authors point out that countries with "longitudinal fairness"--similar rates for personal income, corporate profit income, and capital gains--grew at 2.9 percent in inflation-adjusted per capita GNP over the past decade, compared with 1 percent for all countries.