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Just Shoot Me

Bala, 28, Gordon Gekko in the making, pseudo-intellectual, cynic, bibliophile, obsessive compulsive ranter...

The Flat Tax magic wand

May 15, 2009

One good thing about this whole "Not-Depression" we are in is the opportunity to test the soundness of the various economic doctrines. One such doctrine is the Flat Tax regime. It has been propounded by the "free market" fundamentalists as (one of the) panacea to all the ills of the "socialist" world we live in. The eastern european states coming off the commie yoke, in the 90s drank this kool aid and adapted flat tax regimes of varying percentages. And thus became the poster boys of the flat tax crowd. When everything was well and the credit bubble was alive and kicking, they soared. But when all went to hell, the "Baltic beacon" too has faltered.

Latvia, which has a flat tax of 25 percent, and Lithuania and Estonia, which have 21 percent tax rates, are all in deep economic trouble. They all have huge government budget deficits, a sign that they took in too little in tax revenue to cover their costs, primarily state expenditures to provide a generous welfare state. Conservatives might argue that they didn't slash welfare benefits enough, but there is no dispute that the flat tax didn't provide the expected revenue.

So flat tax regimes are not doing any better than the progressive tax regimes. Everyone is equally in the crapper. The magic runs out when the going gets tough.


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