Ex-communists and capitalism

Reality can sometimes be stranger than fiction.  In perhaps one of the most ironic turns in history, many of the countries from the former Soviet Union have enacted polices that Ronald Reagan would have enthusiastically supported.  Several former Communist countries are leading the way in implementing reforms which reduce the burden of taxes through a flat tax system and some allow people more control over their government—sponsored retirement plans.  Yet the United States is slow to move away from certain economic policies that many former communist countries are now abandoning. 

As the tax reform is on the national agenda it is worth looking at countries where a streamlining of the tax code has been implemented.  Russia has implemented a tax system that Ronald Reagan would warmly embrace.  Prior to 2001 Russia had such a complex and inefficient tax collection that it suffocated the struggling economy, compliance was low and corruption was rampant.

President Vladimir Putin led an effort that abolished the existing tax system and replaced a single tax rate of 13% in 2001. In the three years since it was established, tax revenues have increased significantly.  Perhaps most interesting, more people are filing returns and complying with the law rather than hiding their income from the tax authorities. This is mainly due to the lower compliance costs and the greater economic activity that has results since taxpayers can keep more of their earnings.

The New York Times endorsed President Putin's flat tax initiative.  President Bush applauded President Putin for his reforms, saying

'I am impressed by the fact that [Putin] has instituted tax reform —— a flat tax.  And as he pointed out to me, it is one of the lowest tax rates in Europe.' 

Flat tax systems have also been adopted by other countries such as Ukraine. China, one of the last bastions of communism, is entertaining a flat tax.  The growth of the Chinese economy and the creation of a middle class make a flat tax the logical next step to sustain growth.

In the US, a flat — or flatter — tax system has not been implemented in its purest form, but the concept has shaped tax reform debates for years.  A mostly forgotten achievement of the Reagan Presidency was the Tax Reform Act of 1986.  This remarkable piece of legislation sharply reduced marginal tax rates and eliminated many deductions, despite numerous pressures from a variety of powerful special interest groups representing nearly every group in the country.  This tax reform was one of many factors that help create the 90's economic boom.  While a true flat tax system was politically unattainable at that time, Reagan's Tax Reform Act of brought the American tax code closer to that ideal. 

Unfortunately, with the passage of time some of these gains were lost as national attention turned to other issues — allowing for the usual legislative/lobbyist processes to introduce additional new tax code complexity.

In the United States, the tax code has evolved over most of the twentieth century — used both to raise revenue and to provide incentives for a variety of social and economic goals.  Through the vast variety of deductions and credits, the code is used to encourage a wide variety of behaviors.  These biggest of these incentive programs is targeted at the middle class by subsidizing home ownership through the deductibility of mortgage interest. But special provisions which provide relief for a specific industry or a company are all too common.

Due to the complexity of the current system, it has been estimated that over a half a trillion dollars is spent each year complying with the tax code.  A host of lawyers, accountants and others earn good incomes helping their clients navigate through the more than 2.8 million words of the US tax code.  As a result, activity and resources are devoted to finding or creating advantages in the tax code rather than creating good and services which truly create value and expand the economy.

The notion behind the flat tax system is straightforward.  Under such this system, there would be only one tax rate irrespective of income and only a limited number of deductions.  Instead using the Byzantine form 1040 and all its accompanying schedules, all tax payers could use a shorter form and perhaps even a post card.

In 2000, Steve Forbes, publisher of the business magazine, Forbes, spent millions of his own money running for president.  The centerpiece of his campaign was replacing the current tax system with a flat tax.  While he was never a front runner, his ideas about the flat tax system did gain attention for the issue of tax reform and influenced the debate. Not discouraged by his apparent setback in 2000, Mr. Forbes has resumed his flat tax crusade.  He has a new book, Flat Tax Revolution, Using a Post Card to Abolish the IRS.    Early this year, a bi—partisan commission was formed by the Bush administration to study the current tax system and offer reform alternatives.  Included in the reform ideas being studied by this commission is flat tax system.  The commission's report and recommendations are due at the end of September.

In addition to reforming income tax systems, the former Communist countries are tackling other areas which in the past would have only been debated by the 'capitalist' countries.  An example is supplementing pay—as—you—go social security systems with personal/private accounts.  The most often discussed example is Chile.  Faced with a failing economy and social security system in the early 1980s, the 'Chicago Boys,' a group of University of Chicago—educated economists, helped Chile institute many free market initiatives.  Among their programs was the creation of a pension system that allows payroll taxes to be placed into individual accounts.  The owner of the account can then manage them in a matter they choose including investments in private sector stocks and bonds.  Those workers who elected to participate in this private system back in the 1980's now have a nest egg providing benefits significantly larger than the benefits of the traditional system.  In addition, they control and own the assets in that account.  Former Soviet satellites, Hungary and Poland allow workers to put a portion of their pension funds into accounts they own and control.  China too is considering allowing workers to have personal accounts in their social security systems as well.

Some may view it as bizarre that at the beginning of the 21st century, the ex—communist countries are teaching the United States about capitalism.  Such reforms would be antithesis of the creed of Marx and Lenin —— which had as its central tenants the progressive income tax and the government—funded and controlled old age pensions.  Sadly, this ironic twist of history leads us to the conclusion that some American leaders are espousing economic ideas that are more Marxist/Leninist in nature than that of the current leaders of the former Soviet Union. 

No doubt the irony of this would have brought a smile the man who made it possible for them to even openly discuss such reforms yet alone implement them, Ronald Reagan — who would have shaken his head and said something like 'now there you go again...'
 
James A. Leggette, Ph.D. is an economist and talk radio host.  Michael W. Funk is an executive in the telecommunications industry. They are collaborating on a book on Ronald Reagan's economic legacy.

Reality can sometimes be stranger than fiction.  In perhaps one of the most ironic turns in history, many of the countries from the former Soviet Union have enacted polices that Ronald Reagan would have enthusiastically supported.  Several former Communist countries are leading the way in implementing reforms which reduce the burden of taxes through a flat tax system and some allow people more control over their government—sponsored retirement plans.  Yet the United States is slow to move away from certain economic policies that many former communist countries are now abandoning. 

As the tax reform is on the national agenda it is worth looking at countries where a streamlining of the tax code has been implemented.  Russia has implemented a tax system that Ronald Reagan would warmly embrace.  Prior to 2001 Russia had such a complex and inefficient tax collection that it suffocated the struggling economy, compliance was low and corruption was rampant.

President Vladimir Putin led an effort that abolished the existing tax system and replaced a single tax rate of 13% in 2001. In the three years since it was established, tax revenues have increased significantly.  Perhaps most interesting, more people are filing returns and complying with the law rather than hiding their income from the tax authorities. This is mainly due to the lower compliance costs and the greater economic activity that has results since taxpayers can keep more of their earnings.

The New York Times endorsed President Putin's flat tax initiative.  President Bush applauded President Putin for his reforms, saying

'I am impressed by the fact that [Putin] has instituted tax reform —— a flat tax.  And as he pointed out to me, it is one of the lowest tax rates in Europe.' 

Flat tax systems have also been adopted by other countries such as Ukraine. China, one of the last bastions of communism, is entertaining a flat tax.  The growth of the Chinese economy and the creation of a middle class make a flat tax the logical next step to sustain growth.

In the US, a flat — or flatter — tax system has not been implemented in its purest form, but the concept has shaped tax reform debates for years.  A mostly forgotten achievement of the Reagan Presidency was the Tax Reform Act of 1986.  This remarkable piece of legislation sharply reduced marginal tax rates and eliminated many deductions, despite numerous pressures from a variety of powerful special interest groups representing nearly every group in the country.  This tax reform was one of many factors that help create the 90's economic boom.  While a true flat tax system was politically unattainable at that time, Reagan's Tax Reform Act of brought the American tax code closer to that ideal. 

Unfortunately, with the passage of time some of these gains were lost as national attention turned to other issues — allowing for the usual legislative/lobbyist processes to introduce additional new tax code complexity.

In the United States, the tax code has evolved over most of the twentieth century — used both to raise revenue and to provide incentives for a variety of social and economic goals.  Through the vast variety of deductions and credits, the code is used to encourage a wide variety of behaviors.  These biggest of these incentive programs is targeted at the middle class by subsidizing home ownership through the deductibility of mortgage interest. But special provisions which provide relief for a specific industry or a company are all too common.

Due to the complexity of the current system, it has been estimated that over a half a trillion dollars is spent each year complying with the tax code.  A host of lawyers, accountants and others earn good incomes helping their clients navigate through the more than 2.8 million words of the US tax code.  As a result, activity and resources are devoted to finding or creating advantages in the tax code rather than creating good and services which truly create value and expand the economy.

The notion behind the flat tax system is straightforward.  Under such this system, there would be only one tax rate irrespective of income and only a limited number of deductions.  Instead using the Byzantine form 1040 and all its accompanying schedules, all tax payers could use a shorter form and perhaps even a post card.

In 2000, Steve Forbes, publisher of the business magazine, Forbes, spent millions of his own money running for president.  The centerpiece of his campaign was replacing the current tax system with a flat tax.  While he was never a front runner, his ideas about the flat tax system did gain attention for the issue of tax reform and influenced the debate. Not discouraged by his apparent setback in 2000, Mr. Forbes has resumed his flat tax crusade.  He has a new book, Flat Tax Revolution, Using a Post Card to Abolish the IRS.    Early this year, a bi—partisan commission was formed by the Bush administration to study the current tax system and offer reform alternatives.  Included in the reform ideas being studied by this commission is flat tax system.  The commission's report and recommendations are due at the end of September.

In addition to reforming income tax systems, the former Communist countries are tackling other areas which in the past would have only been debated by the 'capitalist' countries.  An example is supplementing pay—as—you—go social security systems with personal/private accounts.  The most often discussed example is Chile.  Faced with a failing economy and social security system in the early 1980s, the 'Chicago Boys,' a group of University of Chicago—educated economists, helped Chile institute many free market initiatives.  Among their programs was the creation of a pension system that allows payroll taxes to be placed into individual accounts.  The owner of the account can then manage them in a matter they choose including investments in private sector stocks and bonds.  Those workers who elected to participate in this private system back in the 1980's now have a nest egg providing benefits significantly larger than the benefits of the traditional system.  In addition, they control and own the assets in that account.  Former Soviet satellites, Hungary and Poland allow workers to put a portion of their pension funds into accounts they own and control.  China too is considering allowing workers to have personal accounts in their social security systems as well.

Some may view it as bizarre that at the beginning of the 21st century, the ex—communist countries are teaching the United States about capitalism.  Such reforms would be antithesis of the creed of Marx and Lenin —— which had as its central tenants the progressive income tax and the government—funded and controlled old age pensions.  Sadly, this ironic twist of history leads us to the conclusion that some American leaders are espousing economic ideas that are more Marxist/Leninist in nature than that of the current leaders of the former Soviet Union. 

No doubt the irony of this would have brought a smile the man who made it possible for them to even openly discuss such reforms yet alone implement them, Ronald Reagan — who would have shaken his head and said something like 'now there you go again...'
 
James A. Leggette, Ph.D. is an economist and talk radio host.  Michael W. Funk is an executive in the telecommunications industry. They are collaborating on a book on Ronald Reagan's economic legacy.