Date:16/10/2006 URL: http://www.thehindu.com/2006/10/16/stories/2006101603281100.htm

Opinion - News Analysis

Flat taxes have not worked: IMF report

Heather Stewart

FLAT TAXES fail to boost revenues, as their advocates claim, and are likely to be abandoned by the countries that have introduced them, according to research published by the International Monetary Fund.

"The question is not so much whether more countries will adopt a flat tax, as whether those that have will move away from it," the study says, after examining the experience of eight economies that have introduced the policy since the mid-1990s.

Sweeping away variable tax bands and replacing them with a single rate has long been a dream of right-wing economists. Since a number of Eastern European governments introduced flat taxes, support for them has grown in other countries.

But the IMF analysts who carried out the research cast doubt on the main advantage claimed for flat taxes: that they increase revenues by allowing people to pocket more of their hard-earned cash, and thus persuade them to work harder.

This is the so-called `Laffer effect' named after U.S. economist Arthur Laffer. But the authors say: "In no case does there appear to have been a Laffer effect: these reforms have not set off effects strong enough for them to pay for themselves."

They say one reason for countries such as Latvia and Georgia choosing a flat tax was to announce to investors that they were joining the market economy. —