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Politics

Angie and the Flat Tax

2 September 2005

Angie and the Flat Tax

By Gwynne Dyer

No political campaign in the West is now complete without a signature rock song to capture the baby-boomer demographic. If Margaret Thatcher were running for office in Britain today, they’d be playing Rod

Stewart’s “Maggie May” at every rally. Never mind that the actual words are a bit of a problem: “The morning sun when it’s in your face really shows your age…Maggie, I wish I’d never seen your face.” Never mind, either, that nobody ever dared call Margaret Thatcher “Maggie” in her whole life.

Nobody has ever dared call Angela Merkel “Angie” to her face either, but they’re playing the old Rolling Stones song of that name at every rally as the leader of Germany’s Christian Democrat Union (CDU) cruises smoothly towards victory in the national election on 18 September.

There is, again, a certain difficulty with the lyrics — “All the dreams we held so close seemed to all go up in smoke…You can’t say we’re satisfied” — but most of the words get lost in the distortion from the amps, and they had to do SOMETHING about the woman’s image.

The 50-year-old “Ossi” (former East German) who is almost certain to become Germany’s first woman leader denies any aspirations to be another Margaret Thatcher — “She was a chemist, I am a physicist” — and her earnest, almost dour manner makes even Thatcher seem in retrospect like the life of the party. But many suspect that Angela Merkel intends a revolution of Thatcherite proportions.

She certainly isn’t saying that, because her election victory depends upon not being too specific about her plans. The German electorate is fed up with a decade of economic stagnation and high unemployment, and equally fed up with the Social Democrats (SPD), who have been in power for the past seven years without managing to fix the economy. But they don’t want any pain or disruption in their lives.

Almost everybody agrees in principle that “reform” is needed to get the German economy moving again: less rigidity in the labour market, a simpler tax system, and less generous pensions, unemployment pay and other social welfare spending. They agree, that is, until somebody suggests changes that would hit their own interests — and then they resist with fury.

Chancellor Gerhard Schroeder has been treated as a class traitor for his “Agenda 2000” reform programme that tried to revive the German economy by freezing pensions, cutting social spending and making it easier to hire and fire employees. His own party’s left wing broke away and merged with the former East German Communists as the Party of the Left, opposed to all the reforms. Other SPD voters have turned in despair to Merkel’s conservatives — but they still don’t want any pain, so Merkel must not mention any painful economic measures she may have in mind.

The only specific promise Merkel has made is to raise the value-added (sales) tax from 16 to 18 percent, which will no doubt help to balance the budget but won’t do anything to simulate the economy. As long as she doesn’t get into her real plans, she is almost bound to win — but what are her real plans for the world’s third-largest economy?

The most intriguing clue was Merkel’s recent choice of Paul Kirchhof, famous for his advocacy of a “flat tax”, as shadow finance minister. Of course, she then denied that she was planning to bring in a flat tax, but it did feel like a hint to the insiders about what is coming.

The flat tax was pioneered by the Estonians in 1994. Instead of the usual complicated system with graduated rates of personal tax for different income levels, different rates of corporate tax, and hundreds of exemptions and deductions, Estonia simply imposed a flat tax of 26 percent on all personal and corporate income.

No tax is paid on the first few thousand dollars of personal income, in order to keep the really poor people out of the tax net, but that’s it. No big tax-collection bureaucracies, no tax lawyers and tax shelters, and even the very rich have to pay. Generally people and companies DO pay, too, because it’s easy, it keeps you out of trouble, and you have a lot left. Since Estonia brought in the flat tax, its economy has grown at 6 percent a year.

The collapse of the old Communist systems left Eastern European countries with a clean slate, so Latvia and Lithuania followed Estonia almost at once. The trend really took off in 2001, when Russia switched to a flat tax of 13 percent on personal income and a rather higher flat rate (24 percent last year) on corporate profits.

Moscow’s tax revenues rose by a quarter in the first year of the flat tax, and in the past two years Ukraine, Serbia, Slovakia, Georgia and Romania have all shifted to flat taxes as well. In March, Poland announced that it would introduce a flat tax of 18 percent by 2008 — and now, perhaps, the revolution is about to arrive in the first big, fully developed economy: Germany.

It’s the obvious place to start, because Germany’s decade of economic stagnation is due largely to the cost of absorbing 17 million former East Germans. And who would be more likely to adopt these radical

Eastern European ideas than Angela Merkel, who comes from the formerly Communist part of the country? It promises to be an interesting four years in Germany.

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To shorten to 725 words, omit paragraphs 5 and 6. (“Almost…mind”)