Lessons from eastern Europe's flat tax | Hacker News Reader

Lessons from eastern Europe's flat tax

globalpost.com

15 points3pt1415940 comments

I live in eastern Europe and there is one thing that might be relevant. The flat tax here is actually progressive tax in disguise. We have something that could be called non-taxable minimal amount (sorry, I'm not an economist) which is let's say 80 Latvian gold coins (Lgc); the average salary is 400 Lgc; the income tax + social tax is roughly 32% from the amount that remains after non-taxable minimum is substracted. So effectively it would be 0% for people with 80 Lgc salary; 26% for people with average salary; 29% for people with 1000 Lgc salary.

The U.S. flat tax proposals contain similar measures. Some even include a negative tax provision for low incomes.

How long does it take you to compute and then fill out the forms for your taxes? Also, do you have to declare bank accounts held outside the country?

If you're employed then you don't have to do any form filling at all. It's responsibility of your employer to pay all the taxes and you only get the amount after taxes in your bank account. Typically accountants do all the computing.

There is an exception, self-employed people. They do have to fill in forms and compute everything but their taxes are flat, there is no non-taxable minimum. They have less total tax % but also less perks (no paid vacations or sick days etc)

Update: no, we don't have to declare foreign bank accounts afaik. It might change this year because they just started taxing income from capital gains which will cause some headache for me personally.

Latvia isn't really in Eastern Europe, is it?

http://en.wikipedia.org/wiki/Eastern_Europe#The_Baltic_state...

"The Baltic states , Baltic Nations or Baltic countries are three countries in Northern Europe.."

http://en.wikipedia.org/wiki/Baltic_states

Sometimes Baltic states are considered Northern Europe, sometimes Eastern Europe. In any case article mentions Estonia as well.

You gotta love politicians. The discussion is about Europe's Flat Tax.

But katinieks says no, it's really a progressive tax because of all the "tweaking" the politicians have done.

Assuming this is correct, what do reasonable people do? Call it a flat tax and add in "but it's not really" every time it's mentioned? Call it a flat tax and have the _real_ flat tax idea be tarnished by what they've done and called flat?

Not trying to get in on the discussion. As a guy who watches people talk about problems, politics always amazes me in that the language very seldom matches the underlying reality. This makes every honest political discussion a tricky search for definitions. As a side note, I've found once you get the definitions done, most people are not that far apart.

All suggestions for a flat tax I've heard includes a deduction in the beginning. That's hardly tweaking, but certainly not completely flat either. I guess flat is meant to mean flat except for the part that's zero.

I don't know. Honestly, I don't.

It's kind of like the "free market" discussion. Perhaps there never can be a free market? Perhaps the term is so abstract that it doesn't in fact exist anywhere and has never existed?

I support a flax tax in principle. The problem is that once we start indexing the tax to the size of the purchase, or excluding certain purchases, or giving money back? Well, I might or might not support it, but whatever the case, it's not really a flat tax then, right?

1. This is a flat income tax, not a flat sales tax.

2. Sales taxes are regressive.

3. As a general rule, if a concept is simple enough for you to support on principle, the only real-world plausible implementations will be much, much more complicated.

Yes, the problem is that things become much more complicated very quickly, and all real-world implementations do not match theory.

What that means is that principles matter. Taking this back to my original point, and follow-up point, which had nothing to do with taxes: problem solving is many times a search for definitions. Once definitions are agreed on, all solutions become a matter of applying various principles in various degrees. Real-world solutions never match the terms that the original problem is presented in. In fact, good solutions usually involve creation of a new language.

But without mutual clearly-understood terms, you never get there.

I would say that a very large part of modern politics is defining (subverting?) the terms people use.

"Abortion" or "Women's rights"?

I'd also point out that law is in many ways like software, if you try to do a large number of things for a huge audience, the number of edge-cases that must be addressed can quickly become overwhelming.

Unfortunately national governments don't generally have the luxury of just targeting a niche audience or creating different products for different people like a startup might, so there's inherently some complexity in the process, thus room for mistakes.

The "flat tax" is, in my opinion, a red herring.

If people want a simplified tax code, that's one thing-- but there's nothing inherently complicated about a progressively graduated tax rate. It's as simple as looking a single number up in simple table.

Tax simplification has nothing to do with the flatness of the scale, and it's being used as an pretext to shift the tax burden from the very wealthy to the not-so-wealthy.

That is a common misconception. Flat taxes don't shift the tax burden from the very wealthy to the not-so-wealthy, as they generally include a tax free amount of income. That leads to hidden progression, so to speak. Also, the poorer you are, the less likely you are to be able to hire a tax advisor, so you cannot use all hidden loopholes etc. So a flat tax would actually mostly benefit the not-so-wealthy.

The so-called FairTax proposed by some US politicians does in fact shift the tax burden, from the very wealthy and the very not-wealthy to the moderately-well-off. FactCheck, who are generally pretty reliable, have some analysis at http://www.factcheck.org/taxes/unspinning_the_fairtax.html and their second graph (the first one is from the US Treasury Department and is potentially misleading in a way described on that page) divides up incomes at $15k, $24k, $42k, $75k (I'm sure there's a reason for those divisions; are they where current tax rates change or something?) and seems to show the <$15k and >$75k brackets gaining substantially, the $24k-$75k brackets losing out, and not much difference for the $12k-$24k bracket. Later statements there suggest that the actual range in which people will pay more is something like $24k-$200k.

So, it appears that at least one prominent proposal for a "flat tax" shifts the tax burden from the very wealthy and the poor to the middle classes. (I'm guessing that in absolute terms the great majority of the benefit goes to the very wealthy, though quite possibly the poor would feel it more.)

My previous idea of a flat tax (over here in Europe) referred only to a flat taxation of income. The "fairtax" proposal you link refers to a flat taxation of sales; also there are payroll and income taxes in the US. What I don't understand: What's the difference between a flat taxation on sales vs income and, also, what's the difference between a payroll tax vs income tax?

There is one inherent complication involved with a graduated rate. If there is a single rate for everyone without loopholes, then companies can pay income taxes as a percentage of their total payroll, instead of calculating individually for each person. In fact, there would be no reason for a non-self employed person to need to calculate anything at all. If X is the tax rate, then the employer just withholds a X percent from every single paycheck given to any employee. This sort of system would make it much harder for the government to encourage various behaviors without resorting to a direct subsidy, but it would redirect a lot of people from the tax preparation industry into productive work.

If the rate is graduated, then there is no way to know the total amount of income tax owed by a company's employees without doing separate calculations for each.

BTW, the US, UK, and every other supposedly "progressive" tax system I know of actually taxes the rich less, due to complex tax systems that only those who can afford accountants can properly exploit. On a percentage basis, the very wealthy have a much lower tax burden than the middle class under the current system.

I think the key phrase in this post, and what other commenters seem to be missing, and what the hard part of making any changes will be, is "without loopholes". That is the reason the tax code is hard. It's also a small reason(1) wealthy people can manipulate the tax code to their advantage. I don't think it has anything to do with a graduated rate. Granted, a flat tax would allow employers to pay the tax and employees wouldn't have to file taxes, but if there were no loopholes in our current graduated tax system, the government could provide an online form that could have you fill out your taxes in < 5 minutes.

(1) I said a small way because if we really want to get the super wealthy to pay more in taxes, a big way could change things is by making capital gains count as income. This is the reason someone like warren buffet pays 17% of his 46 million income, because it's all capital gains taxed at 15% (http://www.timesonline.co.uk/tol/money/tax/article1996735.ec...). I would be interested in seeing stats how most of the super wealthy (top .1%) make their money, but I would bet it's almost all capital gains.

Link has mandatory video ad. That's a deal-breaker.

I'm generally on the left, but let me ask: what's wrong with abolishing income taxes and, instead, charging consumption taxes on purchases and transfers?

I may be utterly naive in my understanding, but I'd support this. No income tax at all; heavy consumption taxes. Tax private jets and true luxury goods at 95+%, food staples at 0%, inheritance transfers at 99% after an allowed small amount (handing an inheritance down to kids counts as "consumption") and general consumer goods around 30%. Real estate would be taxed 30% in general but much 75% (marginal) if the owner's real estate holdings (including the house being purchased) exceeded 8 years' median income.

The tax would apply to services as well as goods, thus averting the regressive nature of the traditional sales tax.

Please tell me why this is too naive to work. It seems like it would be a major improvement.

So you are really asking a two separate questions:

Your second question is "should we implement a social engineering scheme to avoid the regressive nature of the sales tax"?

I say "no". We do that in Ontario and it has been such a nightmare because it distorts spending, complicates pst filing, and leads to people splitting up coffee orders at Tim Hortons into multiple bills (because a "meal" is tax as a luxury if it is above 4 dollars, and no, this was never adjusted for inflation and yes the tax applies to the whole $4.01 rather than just the cent) and other stupid things (never buy 3 muffins at Tim Hortons, you get bumped into the non-meal bracket, but buying 6 gets you the bulk discount AND exemption from the pst because your presumably buying 6 muffins to take home to your kids, rather than stuffing your face with a 3 muffin "luxury meal"). It is so stupid Ontario is doing away with it and harmonizing with the federal GST.

As for inheritance, this will just hit the lower class. Only people with enough money for lawyers will set up trust funds or "gift" their children $500k to buy their house for them. Also when you say "inheritance transfers at 99%" I assume you mean the government takes virtually all of it. If I were dying and had $100M I'd move to the Turks and Caicos and die there, where I can give my kids what I want.

As for your first question, which is basically "can we implement a simple VAT style tax (ie, tax both goods and services, but let companies deduct the VAT they paid against the VAT they collected) across everything and not greatly disadvantage the poor?" The answer is a resounding "Yes" except for a couple key conditions. First, give every adult a cheque for $7k a year if they have lived in the country for 10 months or more during that year. Don't ask for their income or anything. Then implement a 25% tax on EVERYTHING. "Ohh, but we want to encourage reading" NO! Don't let social engineering make this complicated. As soon as you bring in exemptions you bring in lobbyists, accountants, lawyers, and programming complications. All of which slow down productivity growth which, ultimately, reduces government revenue.

The second thing you need to do is issue a one time cheque to people that are retired, based on their current savings that are not in some form of non-income tax fund. The reason for this is that if someone has paid income tax their whole life and was planning on using their $200k cash they have in their bank account to live, you can't just increase their cost of living by 30% or they will starve.

That's it. Problem solved. No more tax forms, or telling the government how much you earned, or (besides the one time thing) how much you saved. No worrying about offshore bank accounts, or whether a freelancer should incorporate or not. More math brains in science and tech. More business brains in enterprise. The reason it won't ever happen? Politicians need to be busy bees.

It sounds like this is a problem with badly-engineered consumption tax, not consumption tax itself.

I generally agree with your proposals. However, I don't think all forms of "social engineering" are bad. We need to make the best possible statement about ourselves as a society and what our values are, and that means cracking down on the tumors. If our rich want to behave like uncultured oil sheikhs, they can move to the desert, give up their US citizenship, and act like assholes all they want; but as long as they're in America, they'll behave themselves.

The US has a problem with cultural inversion: the people at the very top of society (George W. Bush, Paris Hilton) are uncultured, mouth-breathing trashbag-fuckers, while (on the inverse) it seems like everyone must know at least one brilliant, cultured, educated people who are struggling to pay rent. This is a morale killer. It also ripples through society; the reason we have a "next-quarter" mentality in business and no universal healthcare is that uncultured trash-fuckers have too much money and power. We've got to do something about it, and preferably now while it can still be relatively legal and bloodless. I think a targeted consumption tax is great because it is completely bloodless.

[* "everyone knows" clause in last paragraph edited for correctness]

I downvoted for two reasons: first, because of the "everyone knows" comparison of "uncultured, mouth-breathing trashbag-fuckers" vs. "brilliant, cultured, educated people" which is the opposite of my experience.

Second, for the tone: "uncultured, mouth-breathing trashbag-fuckers" are the words of a status-seeker, not a truth-seeker. Hacker News is above this.

"Everyone knows" was a bit of a reach. What I meant is that there are so many brilliant, educated people getting short-changed-- often due to malevolent factors like medical bills, student debt, and the calamity that is the academic job market-- that it seems like everyone must know one, but then again, I'm not an authority on "everyone's" knowledge.

If society were run by cultured and thoughtful people, we'd have universal healthcare, and we'd have more jobs in the arts and academia. We wouldn't have a society in which more than half of all people are living in fear of losing everything. We can determine by looking at the world we live in, especially compared to the immensity of the resources we have, that the world is either run by (1) incompetents or (2) people with malevolent values and, therefore, a lack of culture. I tend to believe the latter regarding the ruling class.

"The US has a problem with cultural inversion: the people at the very top of society (George W. Bush, Paris Hilton) are uncultured, mouth-breathing trashbag-fuckers,"

It sounds like you are bitter. I also wouldn't put George Bush and Paris Hilton in the same category.

"while (on the inverse) everyone knows brilliant, cultured, educated people who are struggling to pay rent."

If you are brilliant, cultured, and educated, chances are you aren't struggling to pay rent. If you are, then you aren't brilliant or intelligent. I also would like to hear your definition of "cultured". Some elitist douche that reads a new article on green energy or the middle east is not cultured.

"This is a morale killer. It also ripples through society; the reason we have a "next-quarter" mentality in business and no universal healthcare is that uncultured trash-fuckers have too much money and power. We've got to do something about it, and preferably now while it can still be relatively legal and bloodless."

You really think this is why we don't have universal healthcare? I really don't want to debate healthcare here, but I have seen it first-hand, and I don't ever want it here in the US. It also has nothing to do with being "uncultured" or "a trash-fucker".

If you are brilliant, cultured, and educated, chances are you aren't struggling to pay rent. If you are, then you aren't brilliant or intelligent.

I'm not struggling, but I know smart people who are. Startup founders and people trying to make it in the arts come to mind. Not everyone smart immediately becomes rich, you know. I know you don't understand this, but that's how it is for the other 99% of us.

I also would like to hear your definition of "cultured".

Those who have the appropriate sense of historical perspective, appreciation for the arts and aesthetics, sense of social justice, and depth of knowledge necessary to be an adequate leader (in business, politics, the arts, etc.)

By contrast, we have a world run by snake-oil salesmen and bullshitting rainmakers, while culture is utterly devalued. Hence we have graduates of great colleges busing tables in cafes while mouth-breathing trash-fuckers make big decisions that affect their lives.

You really think this is why we don't have universal healthcare? I really don't want to debate healthcare here, but I have seen it first-hand, and I don't ever want it here in the US.

Let me guess. You got really sick outside of the US and experienced another country's health system. You chalked your negative experience up to that country's health payment system rather than, I don't know, maybe the fact that getting sick really, really sucks no matter where you are?

I have seen US healthcare as well. Poor delivery, long wait times, bad service and high error rates. We have the same problems and potentially life-wrecking bills.

"I'm not struggling, but I know smart people who are. Startup founders and people trying to make it in the arts come to mind. Not everyone smart immediately becomes rich, you know. I know you don't understand this, but that's how it is for the other 99% of us."

Art and startups are a huge risk. Many smart people have dumb ideas that will never make money. Art generally doesn't make you money (even some of the most famous artists were poor their entire lives). If those people just got a regular job, they would not be struggling to pay the rent. I'm not saying they should do this, I just think you should stop bitching about it. The world doesn't owe anyone a living.

"By contrast, we have a world run by snake-oil salesmen and bullshitting rainmakers, while culture is utterly devalued. Hence we have graduates of great colleges busing tables in cafes while mouth-breathing trash-fuckers make big decisions that affect their lives."

They don't need to be. If you are intelligent, you will find a way to be successful. Any great college graduates that are stuck waiting tables have other issues. I read a great article on how today's youth refuse to take jobs because many expect a $70,000 entry-level jobs and when they realize that they won't get paid this much, they decide to move back in with mommy and daddy. It's this sense of entitlement that is ruining the US, not a devalued culture.

"Let me guess. You got really sick outside of the US and experienced another country's health system. You chalked your negative experience up to that country's health payment system rather than, I don't know, maybe the fact that getting sick really, really sucks no matter where you are?"

Universal health care waters down the entire system for everyone. I would rather have the choice of a good system than be forced into a mediocre one. Pretty much all of the people I know from Canada have come over here for any major surgery. If the universal health care is so much better, why would this happen?

"We have the same problems and potentially life-wrecking bills."

Universal health care isn't free. It comes out of our taxes. It's also just not a good system. If I saw some form of proof that universal health care will work better for the US than our current system, I will be for it.

You must be a troll. People shouldn't have to struggle to pay rent because they decide to pursue high-risk careers like the arts. Deciding between pursuing a dream vs. eating in fancy restaurants is one thing; having to choose between the dream vs. paying rent is another.

I read a great article on how today's youth refuse to take jobs because many expect a $70,000 entry-level jobs and when they realize that they won't get paid this much, they decide to move back in with mommy and daddy. It's this sense of entitlement that is ruining the US, not a devalued culture.

Good for them! $70,000 is aiming a bit high, especially for a non-science major, but if people who can't get good terms opt out of the work force (and maybe take classes in the mean time) the terms will get better for everyone else who is in the job market. This prevents the race-to-the-bottom dynamic.

Universal health care waters down the entire system for everyone. I would rather have the choice of a good system than be forced into a mediocre one.

We have a mediocre system, and it would get better with universal healthcare. People would get preventative care while their problems are cheap to treat, rather than coming in a complete mess and being more expensive to treat. Those uninsured people often still get treated; they just don't pay the medical bills because they can't. So, the system is already "diluted" in the way you describe.

Pretty much all of the people I know from Canada have come over here for any major surgery. If the universal health care is so much better, why would this happen?

Misconception. Absolutely no one comes to the US for healthcare because of the American medical system. Not even millionaires. People who come to the US for medical care are doing so to get a specific individual doctor who is nationally renowned or who invented a cutting-edge procedure. If said doctor were in France instead, the billionaire would go to France. The fact that we have talented and innovative doctors has nothing to do with our health insurance/billing system. We would still have great doctors if we cleaned up our payment system.

The problem with most types of tax scenarios like you describe, is that the truly wealthy will always find some place else to reside where they can escape the taxes. They are the ones with the means to do it. Tax systems that target "the rich" nearly always net less than they should on paper for this reason. This happens in the US routinely. People flee states like New York and New Jersey and move to places like Florida.

In general, the wealthy will always be able to afford and find a way around things like the inheritance tax and the housing taxes you describe. If the tax is severe enough, people will take drastic action.

The above aside, from an economic perspective, you don't want to discourage people from buying "stuff" with their money. In your example, I'll take private jets and big houses. Lots of people at various rungs on the economic ladder are employed to make and support those things. From the guy that drives the fuel truck (or cement mixer) all the way up through the engineers who design the plane (or archtects who design the house).

There is no "truth" about what necessities and luxuries are. Put any of our great-grandparents' families in a time machine and their children would now be taken away for neglect. For everything you own, somebody out there thinks it's a self-indulgent luxury you'd be better off without.

What gets taxed as a "luxury" would become a political decision, which is a game the rich know how to win. Have you heard why SUVs suddenly became popular? Somebody figured out trucks over a certain weight limit were classified as business necessities with favorable tax treatment.

Anyone who has done well for themselves will leave. Those businesses that start to go well will leave.

Picture the situation: You've started a company that's started to do well. You've worked day and night for years, suffering in the hopes of some payoff. Finally you can afford some nice things, then suddenly you're taxed at 95%. Makes you feel wanted, doesn't it?

Anyone who has done well for themselves will leave. Those businesses that start to go well will leave.

By this logic, why doesn't every successful Bay Area startup just up and move to Dubai?

If a few rich assholes want to live in Dubai, fine by me, but the successful companies are always going to be where the skilled people are. Skilled people are where the infrastructure (education, health) is best, and you have to pay for infrastructure; that's why taxes exist.

Finally you can afford some nice things, then suddenly you're taxed at 95%.

Define "nice things". For me, "nice things" are good books, cool technologies, travel, challenging problems to solve, and interesting company. None of these have to involve luxury goods. My point is that we'd be taxing people based on what they buy, not their income. In other words, the tax is based on what you do with the money, not how much of it you make. If someone gets rich but is using his money reasonably, he pays reasonable taxes. If he wants to belch tons of CO2 into the air by flying around in his custom-built jet with a swimming pool in it, like a lot of the uncultured mouth-breathers in that set, he'll be very highly taxed for it.

Besides, those among the rich who are ascending Society and flying around in private jets are too busy schmoozing and colluding to be building anything useful, just as authors who get sucked up into that high-society shitfest stop writing readable work. (Hard to write anything valuable if you're constantly coked up.) At this point, they effectively ought to retire. If we discourage them from being here, great! They're already past peak, and now they're just taking up space at the top. Their exodus makes room for people with talent and energy.

This actually happened in Britain in the 70's. At one point the top marginal tax rate topped 98%, and a large number of luminaries either moved out of the country or heavily obfuscated their finances. If even one warren buffet moves (or, more likely, suddenly shifts most of his income to barbados with legal financial engineering), it costs the government massive amounts of money.

I won't touch the ad hominem attacks against an entire class of successful people, except to ask if Bill Gates has done anything useful with his money.

"If even one warren buffet moves (or, more likely, suddenly shifts most of his income to barbados with legal financial engineering), it costs the government massive amounts of money."

Laws could be made against moving money out of the country, or at least taxing it on its way out.

In fact, last I looked (some time ago) if you had a net worth of over $100k (or was it an income of over $100k a year.. I forget exactly), and gave up your US citizenship, the US government would simply assume you've given up your US citizenship to avoid taxation, and tax you for the next 10 years anyway, despite you no longer being a US citizen.

We need more laws like that.

I won't touch the ad hominem attacks against an entire class of successful people

Over 90% of people in this class achieved no success on their own, but had it bestowed upon them through family connections and inheritance. Likewise, a lot of genuinely successful (and even very, very rich) people aren't remotely connected to Society and the ruling-class chicanery.

The reason the median American is so easily swindled by the Right is because he erroneously believes most of the upper class to be comprised of more successful versions of himself, ignoring the existence a tightly-interconnected ruling class (not quite a conspiracy, but as close as is possible in a society of this size) that hates his values and is actively colluding against people like him.

Please do show me any statistic or other facts-based argumentation, except for rambling, where it is shown that over 90% of "successful people" achieved no success on their own, but had it bestowed upon them. Have you ever looked at inheritance numbers in any society?

I never said that 90% of "successful people" had not earned it. I said this of 90% of the ruling class. Most are born into it.

By definition, someone who is born into the ruling class and turns out to be an idiot is not "successful". So most of the people I'm decrying are not "successful" people. However, they are powerful. George W. Bush comes to mind.

Dear sir, you seem unaware of the commenting guidelines for Hacker News that in short state that our community cares about tone and civilized discussions with supporting arguments as opposed to the reddit-style blatant unsupported statements and profanity: http://ycombinator.com/newsguidelines.html

This is most likely why this is the third comment from you in this thread being down voted.

Reply on news.ycombinator.com