Slovakia and the Flat Tax
The free-lunch supply-side crowd is crowing over how certain Eastern European nations, including Slovakia, have been growing rapidly allegedly as a result of a move to a flat tax. Witness the comments from President Bush:
Thank you, Mr. Prime Minister. I’m thrilled to be here. I have really been looking forward to this trip to Slovakia. We just had a great discussion. First, I complimented the Prime Minister on putting policies in place that have helped this economy grow. The most important responsibility we have at home is to make sure our people can find work. And the President put a flat tax in place; he simplified his tax code, which has helped to attract capital and create economic vitality and growth. I really congratulate you and your government for making wise decisions. Slovakia is a great example of what can happen when people are set free. And this is an exciting place to be.
Making sure people can find work? Does the President realize that the unemployment rate was 14.3% in 2004? Hopefully it will fall below 13% and is true that recent real GDP growth has been strong. But Slovakia moved to a flat tax only last year, while real GDP growth had been strong even before 2004. Alas, this source only goes back to 2000, but this interactive source charts GDP per capita for various nations standardized in terms of PPP-dollar. (While this measure includes not only real GDP increases but also the U.S. rate of inflation, our inflation rate has been modest over the 1985 to 2002 period displayed.)
Another useful source does mention the move to the 19% tax rate as of 2004 as well as the circa 5% expected growth rate for the year:
Since the establishment of the Slovak Republic in January 1993, Slovakia has continued the difficult transformation from a centrally planned economy to a modern market-oriented economy. This reform slowed in the 1994-98 period due to the crony capitalism and irresponsible fiscal policies of Prime Minister Vladimir Meciar’s government. While economic growth and other fundamentals improved steadily during Meciar’s term, public and private debt and trade deficits soared. Privatization, often tarnished by corrupt insider deals, progressed only in fits and starts. Real annual GDP growth peaked at 6.5% in 1995 but declined to 1.3% in 1999. Much of the growth in the Meciar era, however, was attributable to high government spending and over-borrowing rather than productive economic activity. The economy grew 4.2% in 2003, the strongest growth in Central Europe, and is predicted to expand by more than 5% in 2004.
Note how this discussion attributed growth during the Meciar era to high government spending and also noted the problems created by crony capitalism and irresponsible fiscal policies. One would suspect that the strong growth in the years just before the 2004 change in tax policies might be attributed to less crony capitalism and more responsible fiscal policies.
The rightwing loves to cherry pick years where nations have had temporarily high growth rates and then attribute these to some made-up story as to their favorite tax policy. Using the logic of John Fund, for example, a lot of nations have flat tax systems. We should all celebrate the fact that Slovakia’s very modest income per capita levels are rising, but all one can honestly say is that a flat tax is simple as does Bruce Bartlett. OK – Bruce called a flat tax “fair”, which may be true in the limited sense of horizontal equity as long as we ignore the Steve Forbes exception for capital income.