Evasion or Avoidance?
Having sufficient disposable income for your needs and requirements after paying all that is required by HMIT negates the need to journey down the tax evasion route. By having a low rate of taxation (direct and indirect) or earning a large income you will with ease be able to keep on the straight and narrow.
Flat tax fans point to 'success' in Europe (I think only workable in some parts of the EU)
FT.
By Robert Anderson, Christopher Condon and Vanessa Houlder
Published: March 29 2005 03:00 | Last updated: March 29 2005 03:00
tax codeThe adoption of flat tax systems in eastern Europe - following their earlier introduction in Hong Kong and the Channel Islands - has sparked growing interest in western Europe and the US.
Advocates, led by several prominent think-tanks in western capitals, say flat taxes, involving a single rate levied on a broad base, increase tax revenues by boosting the economy and reducing avoidance.
Madsen Pirie, president of the Adam Smith Institute, the London-based think-tank, says there is a "rising tide" of interest in flat taxes in industrialised countries, where the Paris-based Organisation for Economic Co-operation and Development has reported that average income taxes are now starting to rise again. "It gives governments the opportunity to play it both ways. It allows them to escape the flak from increasing income taxes while not jeopardising their revenues."
This month, Poland's centre-left government announced that it would introduce a flat tax system by 2008. The new scheme would set taxes on all personal income and corporate profits, as well as value-added tax, at 18 per cent.
Even if, as is likely, the current government loses parliamentary elections later this year, Poland is still expected to introduce a similar scheme because the opposition favours a flat tax rate of 15 per cent.
Critics of the flat tax, including Poland's fading leftwing parties and increasingly powerless labour unions, argue that it merely shifts the tax burden from the wealthiest to lower and middle-income groups.
Advocates in government view it as a means of boosting tax revenues and attracting foreign investors.
In much of the industrialised world there has already been a marked trend towards flatter, or simpler tax systems. Over the past 20 years, the number of tax bands in most countries has been drastically reduced, according to the OECD.
Countries have also tried to broaden their tax base by reducing the number of tax exemptions and allowances.
Nine eastern European countries, from Estonia in 1994 to Romania and Georgia this year, have been particularly aggressive, setting low, flat rates on personal income and often equally low corporate taxes. But while most economists agree that lower taxes have boosted growth in eastern Europe, the impact of flat income taxes remains controversial.
The clearest benefits are easier administration and a better understanding of tax bills. Moreover, lowering the tax rate and broadening the base discourages tax avoidance and evasion.
That appeared initially to be the case with Russia, which adopted a 13 per cent flat tax in 2001. In 2002, income tax revenues rose by more than 25 per cent in real terms. Many immediately credited the flat tax.
But in January, the International Monetary Fund published research on Russia that did not agree: "Our analysis suggests that the strength of personal income tax in Russia over this period was largely driven by a rise in real wage rates, unrelated to the tax reform."
In Slovakia, where a 19 per cent flat tax was introduced last year, income tax revenues fell 21 per cent. The government covered most of the shortfall with higher excise and sales taxes.
Supply-side economists argue that an economy will benefit substantially from the increased savings and investments created when citizens are allowed to keep more of their earnings.
In eastern Europe, several flat tax countries are, indeed, booming. But the connection to flat income taxes is, as yet, flimsy.
In Slovakia, where the economy has boomed with the help of foreign investment, officials say the flat tax has helped attract the attention of investors.
But the real drawing power, according to tax specialists and company managers, comes from Slovakia's low wages and low corporate taxation. Manufacturers, they say, have almost nothing to gain from lower income taxes.
The flat tax concept also raises concerns about social justice. The OECD argues that flat tax systems are not necessarily regressive: the size of the tax-free personal allowance tends to be more important than tax rates in determining how progressive a tax system is.
In Slovakia, the overall package of tax reform that included the flat tax has proved painful to some. Upper income groups have benefited substantially while low-income groups have received some minor benefit from a doubling of the tax-free allowance.
Many middle-income earners, however, particularly those without children, lost out from higher consumption taxes. "The flat tax is . . . not necessarily good for tax revenues or in the short term for equality," says Ben Slay of the United Nations Development Project in Bratislava.
Such problems might eventually give rise to stronger opposition to flat taxes in the region, but there is little sign of that yet.
Charles Robertson, an economist for ING Bank, notes that Estonia has applied a flat tax for more than a decade without opposition. "Estonia has done incredibly well, and no political party is saying 'It is about time we tax the rich a little more'." Indeed, Estonia recently lowered its flat rate from 26 to 24 per cent.
The flat tax will probably have more time to prove itself in eastern Europe as the global debate rumbles on.
) - the governmant has a duty to ensure that these children are catered for, even if they are likely to become carbon copies of their parents - they must be given a chance to ensure that this doesnt happen.
