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European Trade Unions Denounce Flat Taxes

by Ulrika Lomas,, Brussels

07 September 2007

The European trade union movement has denounced flat taxes as "contrary to the European social model" and has called on the government of Bulgaria, which recently entered the European Union, to scrap plans for one of the lowest flat taxes in the EU.

In a statement issued this week, the European Trade Union Confederation (ETUC) claimed that flat taxes put welfare systems under strain, increase poverty and do not not bring about higher rates of investment.

"This so-called tax reform is a clear breach of the pact. Furthermore, it will destabilise the economy and increase inequality and poverty in Bulgaria," ETUC argued.

At a joint press conference earlier this week in Sofia, ETUC Deputy General Secretary Reiner Hoffmann suggested that flat taxes are "in clear contradiction to the principles of the European Social Model".

“From experience in other EU Member States there is no evidence that flat taxes improve competitiveness, but on the other hand they will put welfare systems and public services under pressure,” he said. “Only countries with decent and graduated tax systems, like those in Scandinavia for example, will meet the Lisbon targets of economic competitiveness, social cohesion and environmental sustainability.”

In August, the Bulgarian government revealed plans for a flat tax on personal incomes as a way to simplify the tax system and increase compliance rates.

The government has said that the 10% flat tax will be introduced in October. It will replace a system within which income tax rates vary from 20% to 24%, but which also contains many concessions.

"The introduction of the flat tax is expected to generate bigger financial resources for the budget and "bring to light" the incomes," Prime Minister Sergei Stanishev has said.

Finance Minister Plamen Oresharski told the Trud daily in an interview that the new system would also put an end to tax concessions.

"The philosophy of taxation is either charging a high tax rate accompanied by numerous concessions and preferences or a low tax rate without any tax-free minimums or deduction of inherent expenses from the taxable amount," the Finance Minister explained.

Flat taxes are becoming a favoured fiscal tool for governments seeing to improve rates of investment, and free market economists argue that they boost growth, efficiency, and competitiveness. A report issued recently by the Center for Freedom and Prosperity Foundation suggested that Iceland's low-rate 18% corporate income tax, and 10% flat tax on capital income had done just that.

Estonia is another frequently cited example of successful flat tax reforms, with free marketeers noting how the Baltic state has been transformed from a moribund ex-Soviet satellite nation into one of the most successful economies in the region, in little more than a decade.

When Mart Laar, former Estonian Prime Minister, took power in 1992, inflation in Estonia was over 1,000%, the economy was falling at a rate of 30%, unemployment was over 30%, 95% of the economy was state-owned, and 92% of Estonian trade was dependent on Russia. By 2005, inflation had stabilised at 4%, unemployment had fallen to below 10%, and gross domestic product was estimated to have grown by a robust 7.4% in 2005.

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