The Czechs Adopt a Flat Tax

The lower house of the Czech parliament passed legislation earlier today implementing a 15 percent flat tax on personal income. The new tax system will take effect on January 1, 2008, and the rate is then scheduled to drop to 12.5 percent in 2009. The legislation also reduces the corporate tax rate from 24 percent today to 19 percent by 2010.

The reform, which was narrowly passed by 101 members of the 200-member parliament, now goes to the upper house, where the government has a massive majority and no obstacles are expected. Once the reform clears that hurdle, it will then be signed into law by the Czech President Vaclav Klaus, who is a free-market economist. That act would make the Czech Republic the 20th country to adopt a flat tax. (The Bulgarian government has agreed to introduce a flat tax by January 2008, but the measure has not yet passed through the Bulgarian parliament.)

The opposition socialists have stated that they will repeal the law if or when they return to power and may even raise constitutional objections to it. For now it seems, however, that the legislation will come into force.

The Czech flat tax is a big step in the right direction, and another sign that tax competition is having a positive effect. But the legislation is not perfect. One of the salient features of a pure flat tax is the elimination of tax exemptions, deductions and loopholes. The Czech legislation is less ambitious and many of the bad features of the current system will remain in force. Also, the 15 percent tax rate will be levied on gross income, including payroll taxes. This means the tax rate is not directly comparable to nations that impose the flat tax only on net income, such as Slovakia.