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CF&P Foundation Press Release

Center for Freedom and Prosperity Foundation

For Immediate Release
Tuesday, September 5, 2006
202-285-0244
www.freedomandprosperity.org

The Slovakian Tax Reform:  Flat Tax System is Very
Successful, Though New Government May Weaken and
Undermine Pro-Growth System
CF&P Foundation Issues Second in a Series on World Tax Systems

 (Washington, DC, Tuesday, September 5, 2006) -- Today, the Center for Freedom and Prosperity Foundation released its second research paper in a series of studies examining different tax systems from around the world. The study, entitled "The Slovakian Tax System -- Key Features and Lessons for Policy Makers," is authored by Martin Chren, the Director of the F. A. Hayek Foundation -- a think-tank based in Slovakia, and represents a comprehensive analysis of the Slovakian tax system. Mr. Chren finds that Slovakian flat tax which took effect in January 2004 created a fair and simple tax system that put Slovakia's economy on a path to higher growth and led to a better standard of living for its citizens.

Link: The Slovakian Tax System -- Key Features and Lessons for Policy Makers:
http://www.freedomandprosperity.org/Papers/slovakia/slovakia.shtml

Below: Executive Summary and Key Observations

Comments on the study:

Andrew Quinlan, CF&P Foundation ~ "Slovakia has proved to the rest of the world that a fair and simple flat tax is good for taxpayers, good for the economy, and good for government. Martin Chren's thorough paper is a road map for reformers in other nations."

Daniel Mitchell, The Heritage Foundation ~ "Slovakia is a role model for economic reform. The flat tax, along with other reforms, has attracted jobs and investment to the nation. One hopes the new government will resist the temptation to kill the goose that lays the golden eggs.'

Veronique de Rugy, American Enterprise Institute ~ "High-tax welfare states such as France and Germany are unhappy about Slovakia's competitive flat tax, but they should emulate this pro-growth policy. Slovakia shows that a flat tax works, even when using very cautious assumptions."

Note: Over the next few months, the CF&P Foundation will release several more papers reviewing the tax systems of selected countries. The next study will examine the tax system of Hong Kong, followed by papers on the tax regimes of Russia, Ireland, France, the United Kingdom and Switzerland. The first paper in the series was a study on the tax system of Sweden (http://www.freedomandprosperity.org/Papers/sweden/sweden.shtml).

Executive Summary

Born after the peaceful 1993 dissolution of Czechoslovakia, Slovakia is a small country of 5.5 million people that has captured the attention of economists, entrepreneurs, and politicians from around the world thanks to a 19 percent flat tax enacted in October 2003 and implemented in January 2004.

The Slovak tax reform is a real step towards a tax system that is better and fairer for taxpayers. Marginal tax rates on work, saving, and investment were reduced, while the elimination of special preferences reduced the likelihood that decisions would be made for tax reasons rather than economic reasons. This is a key reason why the country is enjoying strong growth of about 6 percent per annum. As noted by the US State Department, "Since 1998, Slovakia's once troubled economy has been transformed into a business friendly state that leads the region in economic growth."

Growth has averaged nearly 6 percent annually since the flat tax was adopted and the unemployment rate has dropped according to the International Monetary Fund.  Income tax revenues have exceeded forecasts. Combined with fiscal restraint, this has significantly lowered government borrowing.

However, a key question for investors and entrepreneurs is whether Slovakia will take a step backwards following elections in June 2006. The new government is comprised of parties with a populist tint and seems intent on policies that would penalize the nation's most productive citizens a move that would send a negative sign to global investors.

Key Observations:

  • Slovakia is known as the "Tatra Tiger" for its sweeping economic reforms. In addition to tax reform, Slovakia has implemented personal retirement accounts, liberalized labor markets, enacted school choice, and reformed the welfare system.
  • Slovakia is a market-oriented nation, though it does not rank among the world's most free economies. It is the 34th freest nation in the world according to the Heritage Foundation's Index of Economic Freedom and the 54th freest nation in the world according to the Fraser Institute's Economic Freedom of the World. But while it lags in some categories, Slovakia has dramatically improved its economic ranking since 1999.
  • The flat tax and other reforms have improved economic performance. After adjusting for inflation, economic growth has been average about six percent per year.
  • The flat tax reform has generated a supply-side feedback effect. Because lower income tax rates stimulated additional productive behavior, personal income tax revenue collections in the first year were higher than forecasted by static revenue estimates. Likewise, value-added tax collections were lower than forecast in response to the generally higher tax rate.
  • Slovakia's reforms have triggered better tax policy in other jurisdictions. Shortly after implementing the flat tax, neighboring Austria reduced its corporate tax rate from 34 percent to 25 percent. Romania also adopted a 16 percent flat tax modeled after the Slovakian system.

Link to paper:
http://www.freedomandprosperity.org/Papers/slovakia/slovakia.shtml

PDF version of paper:
http://www.freedomandprosperity.org/Papers/slovakia/slovakia.pdf

 

For additional comments:

Martin Chren can be reached at martin.chren@hayek.sk
Andrew Quinlan can be reached at 202-285-0244,
quinlan@freedomandprosperity.org
Dan Mitchell can be reached at 202-608-6224,
dan.mitchell@heritage.org
Veronique de Rugy can be reached at 202-862-7165,
VdeRugy@aei.org
 

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