Научно-исследовательский центр Мизеса

Belarus will keep its progressive income tax in 2006. This decision follows from the House of Representatives' recent amendments to the Belarusian income tax legislation. Five tax rates, from 9 to 13 percent, are a senseless and harmful system. It is senseless because an effective individual income tax rate has been varying just between 9.1 and 9.5 percent in Belarus in the recent years. It is harmful because the government's pursuit of the so-called social justice makes tax administration very expensive and sends many incomes into the shadow.
As a result, people with low to medium incomes are the ones who suffer. Belarus disregards the positive experience of many countries where the application of a flat tax rate is bringing its good results. While debating the income tax law recently, lawmakers presented arguments that were old as the world. According to Syarhey Kisyalow, chairman of the lower chamber's budget, finance and tax policy committee, "the keeping of the progressive scale of tax rates and the refraining from switching over to a linear tax rate, say, of 13 percent, will help us avoid a negative impact on public budget revenues, because income tax is fully paid to local budgets...In addition, the preservation of the existing income tax calculation practice will preclude the transfer of tax withdrawals from people with high incomes to people with low incomes."
Let us have a closer look at the arguments given by opponents of the flat income tax. Myth No. 1: public budget revenues will decrease. This is a prejudice, a mistake and simply a result of intimidation on the part of people who are not competent in economics. Russia introduced a 13-percent flat tax rate in 2001. Government revenues have increased manifold since that time. They rose by 26 percent just one year after it was introduced. The effect could have been even larger, if the use of the flat tax rate went together with other measures aimed at reinforcing public confidence in the government. Other countries using the flat tax rate have also improved their public finances.
An oversimplified and mechanical assumption that the smaller the rate, the small the amount of tax proceeds is a serious economic and methodological mistake. The Belarusian authorities should not have any fear that their revenues would fall. They should be afraid of keeping the existing tax policy for the future.
Belarus ranks last (!) in the world in terms of tax payment conditions: the country's government wants 122% in tax from gross profit. The state is actually encouraging citizens to evade taxes. Belarusian businesses make 113 payments to three agencies, and all have to be completed in paper form. They have to spend 1,188 hours a year to complete all the respective formalities and two years to get their tax refunds.
Meanwhile, studies by many international think tanks show convincingly that a systemic tax reform increases labor productivity, leads to growth of business and improves employment statistics. Even if revenues shrink in the first year, they exceed the performance of the progressive system already in the mid-term.
Belarusian lawmakers say that they have failed to find arguments for the president to convince him to support the switchover to a flat tax rate. It looks like they never World Bank reports and study findings by independent economists, otherwise they would have enough arguments to start a profound tax reform.
Myth No. 2: a flat tax rate is only good for the rich. Rich people can always "optimize" their taxes in such a way that even if the state wants them to pay 30 percent or more, it will get much less. In Belarus, the system of progressive taxation is targeted against enterprising people who want to become a robust middle class instead of sitting on the state's neck. A flat tax rate would be good for the whole country. It means smaller costs of tax administration, de-bureaucratization of business and important step to create partnership and climate of trust between the state and the business. One may not be an economist to see that the poor are the ones who suffer most from a large bureaucratic state.
So, Belarusian lawmakers should have come out against an all-permeating and bulky state rather than against the flat tax rate, because the existing state system deprives the Belarusians of effective ownership rights and discriminates against them.
Myth No. 3: a flat tax rate does not take half-legal incomes out of the shadow. It is always unwise - both in the economy and in life in general - to make conclusions judging just by a small piece of the whole picture. Belarusian parliamentarians have learned the Russian experience superficially. This country said A but never said B. Taking incomes out of the shadow is not only about reducing individual income taxes. It is also about reducing payroll taxes, but Russia has never did that.
State campaigns against "envelope" pay in Russia, as well as in other countries with high social taxes, are often unsuccessful, because a comprehensive approach is needed rather than because of the flat tax rate. People can start legalizing their incomes only if they trust their government.
Tax evasion is not something special for Belarus, Russia or Ukraine. It is spread worldwide in those countries where the state wants to dig deeper in the pockets of its citizens. Apart from everything else, the House of Representatives decided that incomes from second jobs would be automatically subject to a 20-percent tax, and they would not have to be mentioned to be shown in annual declarations.
This is an example of punishment for diligence. With the effective income tax rate below 10 percent, it is amoral and economically harmful to take 20 percent from the additionally earned money. People work 10- or 14-hour working days not because they like it very much. They want to create good conditions for their children. They want to have decent living standards, without looking back at the looming threat of poverty.
So, it turns out that the Belarusian authorities do not want millions of their people to be better off? High taxes and progressive scale are the surest ways of pauperizing people.
Meanwhile, seven countries of the Organization of Economic Cooperation and Development, an organization of rich countries, cut their income tax rates in 2000-2003. Flat tax rates are considered in Poland, the US, New Zealand and Southeast Asia. Belarus should lower its taxes if it wants to compete with Russia and Ukraine and if the government wants to be respected by its citizens.

Flat income tax by country