Bush Impressed With Estonia's Flat Tax

by Mike Godfrey, Tax-News.com, Washington

30 November 2006

President George W. Bush took the opportunity during a brief stop-off in Estonia to pay tribute to the country's pioneering flat tax system, hinting that he would be keen to emulate such a system in the United States.

"They've got a tax system here that is transparent, open and simple," Mr Bush noted after being shown how the rapid development of Estonia's e-commerce infrastructure allows Estonians to file taxes online and the Estonian government cabinet to conduct meetings almost entirely online and vote on legislation electronically.

Bush was in Tallinn on Tuesday en-route to a NATO summit in neighbouring Latvia where he met with Estonian President Toomas Hendrik Ilves Prime Minister Andrus Ansip.

Clearly impressed, Bush later praised the country's tax system during a joint press briefing with President Ilves, noting that: "I am amazed to be in a country that has been able to effect a flat tax in such a positive way."

Estonia's flat tax was introduced under former Prime Minister Mart Laar in 1994, initially at a rate of 26%. The income tax rate has been gradually reduced in the meantime and currently stands at 23%.

Laar's economic and tax reforms have been widely credited with turning round an economy which was suffering from inflation of 1000%, unemployment of 30% and was whose trade was almost entirely dependent on Russia. By 2005, inflation had been tamed to just above 4%, unemployment had fallen under 8% and the economy was growing at a rate of more than 10%.

Estonia's tax reforms were used as a template for other former eastern-bloc countries during the often painful transition from command economies to more capitalistic systems, with Poland, Russia, Latvia, Serbia, Slovakia, Georgia and Ukraine implementing similar systems.

The flat tax issue has also now become fairly entrenched in the political debate of western economies, including the United States, where advocates of the system argue that it sweeps away much of the complexity of progressive tax systems, allowing businesses to spend more time and money investing for growth rather than on minimising tax. They also argue that there would be less loopholes for businesses to exploit, thereby leading to higher levels of compliance and increasing the tax take for governments.

While tax reform was originally high on Bush's agenda when elected in 2000, and the Estonian model seems to have impressed him, his own tax reform panel only toyed with the idea of a flat tax before shelving the idea in favour of two less controversial proposals that reduced the number of tax brackets and stripped away the deductions and special interest tax breaks that make the current system so opaque.

However, with the Republicans having lost control of Congress, and with pressing issues such as social security and health care reform, not to mention the wars in Iraq and Afghanistan, occupying lawmakers in the final two years of his presidency, Bush may have already left it to late to force through any meaningful simplification of the US tax code.

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