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News of the Day ... In Perspective

11/27/2006

Reagan tax cuts a global tide

Twenty-five years after the Reagan tax cuts sliced the top marginal tax rate on personal incomes from 70% to 28%, leading to a spurt in economic growth and tax revenues, Congress still decrees that no tax cuts may be passed into law without a corresponding “offset.” This is based on the assumption that taxes have nothing to do with incentives.

But since the Berlin Wall fell, much of the rest of the world has taken notice of the effect of taxation.

“Communism had been running what might be called a 40-year demonstration study in life at one end of the Laffer Curve—what happens to economies when you tax away pretty much everything,” writes Daniel Henninger. Freed from utopia, nations of Eastern Europe tried a different approach. In 1994, Estonia was the first to cut taxes, establishing a flat rate of 26%.

Other flat-tax regimes now include: Lithuania, with a rate of 33%; Latvia, 25%; Slovakia, 19%; Romania, 16%; Ukraine, 13%; Russia, 13%; and Georgia, 12%. The U.S. top rate is 35%. The growing economy of Slovakia, once the economic sad sack of the region, has become its envy.

When Austria cut its corporate rate from 34% to 25%, companies started moving across the German border.

Next to easing regulations on new businesses, reducing tax rates and the administrative hassles of paying taxes has become the most popular global reform in the past few years, according to a report of the World Bank (Daniel Henninger, Wall St J 11/16/06).

Macedonia’s new conservative government announced plans to scrap the 15% corporate tax rate and 15–24% personal income taxes and replace them with a single 12% rate. In 2008, the rate will come down to 10%, matching Kyrgyzstan’s flat rate of 10% as the world’s lowest (“Tax Advice from Skopje,” Wall St J 11/16/06, cited in NCPA Daily Policy Digest 11/16/06).

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