Practise reading the following words and collocationsa) Evasion; revenue; compliance; simplicity; enact; pension; unemployment; privilege; annualized; resource; appreciably; implementation; although; overwhelmingly; incentive; knowledge; equally; pervasive. b) Emerging market economy; tax avoidance; separate tax; social insurance; customs duties; anticipated inflation; excise taxes; tax avoidance or tax evasion. c) To be complicated; to eliminate taxes; to exceed; to harmonize tax codes.
THE FLAT TAX On January 1, 2001, a 13 percent flat tax on personal income took effect in Russia. The old system was complicated, and because of the high rates evasion was widespread. It also produced little revenue. The new flat tax has achieved greater compliance due to its simplicity and low rate. It is producing far more revenue than the former system. The United States and other developed countries could learn from the experience of Russia and other emerging market economies. President Vladimir Putin proposed a flat-rate income tax to replace the progressive income tax rate in order to increase government revenues by reducing tax evasion. Russia also reduced the corporate profit tax rate from 35 % to 24 % (effective January 1, 2002). It enacted a flat rate small business tax – the lesser of 6 percent of gross sales or 15 percent of profits. Other tax reforms included reducing the business sales (turnover) tax rate; replacing separate taxes for pensions, social insurance, medical insurance and uneployment with a unified, lower social insurance tax rate; eliminating most small nuisance taxes and tax privileges; and reducing customs duties. During its first two years Russia’s 13 % flat tax exceeded all expectations:
- In 2001 personal income tax revenue were 28 % higher than in 2000 and rose another 20.7 % in 2002. - During the period January to June 2003, compared with the same period last year, personal income tax revenue increased by 31.6 %. - After adjusting for anticipated inflation of about 15 % annualized over 2003, real rubles from the personal flat tax increased by 16.6 % year-over-year.
Income tax revenues now exceed excise taxes and taxes on natural resource use. Personal income tax revenue is fast catching up with revenues from the corporate income tax and value added tax. Russia’s total tax revenue has grown appreciably since the implementation of the flat tax. Russia’s rate of growth in Gross Domestic Product (GDP) also hit a record of 9.0 % in 2000, after adjusting for an 18 % inflation rate. Although the economy grew at a slower rate in 2001 (5.0 %) and 2002 (4.3%), revenues continued to rise. Following Russia’s adoption of the flat tax, Ukraine’s parliament overwhelmingly approved its own 13 % flat tax on personal income (to take effect January 1, 2004) as in Russia, Ukraine reduced its tax rate on company profits from 30 to 25 percent. In Europe among a growing number of countries that have adopted a flat tax are Estonia (implemented in 1994), Latvia (1995), Russia (2001), Ukraine (2004). Others are expected to follow:
- Belarus intends to harmonize its tax code with that of Russia’s. - The Slovak Republic is about to enact a 19 % flat tax for both individuals and corporations (effective January 1, 2004). - The opposition Civil Democratic Party (ODS) in the Czech Republic has drawn up plans to replace the progressive tax system, which has a top rate of 31 %, with a 15 % flat tax on both personal and corporate income. - Political parties in Poland and Georgia have announced their support for the flat tax and there is interest in Bulgaria and Romania. - Even China has taken the step of translating The Flat Tax into Chinese for consideration by the Ministry of Finance. Why so much interest in the flat tax? A key reason is that it is far more effective at raising revenue than progressive rates. With progressive rates it looks as if extra revenue is being extracted from the wealthy. With a flat tax, there is much less incentive to engage in tax avoidance or tax evasion. Also, the knowledge that everyone is being treated equally helps eliminate the culture of evasion that often becomes pervasive in high-tax countries.
Vocabulary
Exercise 2 Ask questions to the following sentences: 1) Because of the high rates evasion was widespread. 2) To replace the income tax in order to increase government revenues by reducing tax avoidance. 3) Compared with the same period last year, personal income tax revenue increased by 31.6 %. 4) After adjusting for anticipated inflation of about 15% annualized over 2003. 5) Following Russia’s adoption of the flat tax, Ukraine’s parliament overwhelmingly approved its own flat tax. 6) It is far more effective at raising revenue than progressive rates.
Exercise 3
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