The East's Flat-Tax Fad

Russia, Ukraine, Latvia, and Estonia have all adopted flat taxes in recent years -- in bids to simplify their tax systems, boost collection, and attract more foreign investment. Now, Slovakia is getting into the act. The center-right government of Prime Minister Mikulas Dzurinda recently approved a proposal to set both personal and corporate income-tax rates at 19%. If passed by Parliament as expected, the radical tax reform would take effect on Jan. 1, 2004.

Dzurinda promised to lower taxes when he campaigned successfully for reelection to a second term last year. The reform would represent a sharp reduction from personal income-tax rates that now run as high as 38% and from the current 25% levy on corporate profits. "People are saying: 'Wow, this is progressive tax reform,"' says Jake Slegers, executive director of the American Chamber of Commerce in Slovakia.

The government hopes the flat-tax regime will attract new foreign investors to Slovakia, which has only received about $8.5 billion in foreign direct investment since 1990. Another aim is to compensate existing investors for the tax breaks they will lose when Slovakia joins the European Union next year. The government hopes the reform will help keep economic growth -- 4.4% in 2002 -- humming along. It may also pressure neighboring high-tax states, such as the Czech Republic, to follow suit. Czechs currently pay up to 32% on their personal incomes, while Czech companies pay 31% on their profits.

By Christopher Condon in Budapest

Edited by Rose Brady

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