When one looks at the following list of countries, what words jump to the front of your mind?
- Kyrgyz Republic
Corruption? Mafia? Ethnic cleansing? Danger? War, famine death and pestilence?
What should jump to your mind is FLAT TAX. These countries have figured out that the way to make their economy grow and to increase tax collection for needed government programs is to institute a flat tax.
Of course, Hong Kong has known this for years, which explains its perennial good fortune.
Meanwhile, the US IRS, UK Inland Revenue, Revenue Canada, and the various tax collectors across the EU and other “highly developed” countries spend every waking hour trying to figure out how to squeeze more taxes out of an already overtaxed populace. Then are amazed and shocked that the more in independent minded of their subjects want to move their money offshore. They simply don’t grasp the concept that so-called “progressive” tax rates punish success, encourage tax avoidance and evasion, and if too vigorously prosecuted cause tax expatriation.
Russia is a perfect example. Despite its other obvious problems, it went from an empty treasury and massive tax evasion before the flat tax, to a budget surplus after—but despite that success with personal taxes, they haven’t figured out that they could multiply that success by using the same remedy for company taxes. There are just too many IMF, OECD and World Bank types swarming around to allow for clear thinking.
The Kyrgyz Republic is my personal favorite. Its 10% business tax rate has allowed us to integrate Kyrgyz companies seamlessly into our various ventures. Bishkek is a small but growing IFC in its own right.
A flat tax is not a universal panacea, but it does help fuel the creation and growth of a middle class in these countries, and historically, personal freedom grows concurrently with the middle class.
Macedonia, tied with Kyrgyzstan for the lowest tax rate at 10% will have the lowest in Europe. The results for this tiny landlocked and troubled country have already been noticed. One of the great things about a small country is that it is easier to change the direction of the momentum than for a big country. Macedonia has come a long way from just a few years ago when the regional joke was: “in Macedonia they are so poor they drive stolen Yugos”.
As these countries shake off their Soviet Era management techniques and embrace more entrepreneurial practices they are going to start to become serious players in the world markets. In the meantime, flat tax companies should be considered as a legitimate element in offshore planning—there is nothing that defeats the tax collector at home better than already paying taxes—even at a much lower rate—in another country that is NOT a tax haven, but is simply tax smart.
Tax competition among governments is good for the same reason that business competition is good: it gives the end user better products and services at lower costs. Of course, the OECD does not want to compete, they would rather simply have bureaucrats take ever higher salaries for ever lower production until they have transformed themselves into a new aristocracy as feckless and irresponsible as the worst Mandarin, Boyar, or Conte.
One last point that needs to be made—the existence of tax havens and low tax countries actually helps preserve the social fabric of high tax countries. If the rich can expatriate some of their money while paying taxes on the rest, they are less likely to expatriate themselves. One only has to look at the pre-Thatcher days of punitive income taxes and the migration of thousands of Britons to the US for a better deal.
We are not in danger of sailing off the edge of the earth and falling into a limbo of dragons and other monsters, but countries that continue ever higher taxes without allowing any escape valves may well end up with dragons, monsters or worse…