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elite.club.of.the.[Locked_OUT]{outKasted}
 elite.club.of.the.[Locked_OUT]{outKasted}      10.03.2006 - 05:05:54 , level: 1, UP   NEW
THE DETROIT OF EUROPE
by Steve Forbes

"Complex" does not begin to describe the shortcomings of Slovakia's former
tax code. It had five tax brackets ranging from 10 percent to 38 percent;
90 different exemptions; 19 unique sources of tax-free income; 66 items
that were themselves tax-exempt; and an additional 27 items that carried
their own particular tax rates. A split value added tax (VAT) taxed some
items and services at 14 percent, others at 20 percent, which made the
code even more pretzel-like. Confusion reigned because tax laws changed
twice a year.

Not surprisingly, countless citizens avoided the tax system altogether.
Slovakia's shadow economy accounted for a high percentage of the country's
actual economic output. Slovaks had little incentive to create domestic
capital because of onerous tax rules. And foreign investment would not
come rolling in without reform.

Government leaders knew something had to be done to address this
growth-suppressing mess. In October 2003, parliament passed a flat tax
reform bill that was initially vetoed by the president, Rudolph Schuster.
Parliament overrode the veto in December. This reform bill unified and
simplified the Slovakian tax regime, creating one rate across the board.
The personal income tax, the corporate income tax and the VAT, were all
set at 19 percent.

Personal income taxes dropped for almost all Slovaks. Those at the
high-end of the income scale have seen their highest tax rate fall from 35
percent to 38 percent down to 19 percent. The flat tax avoided a tax
increase on lower income taxpayers by including a personal deduction of
$2,600; this exempted half the average yearly wage in Slovakia. The
previous personal exemption was only $1,246.

The new law reduced the perverse incentives that had driven so much of the
economy into the informal sector. As tax rates were slashed and
simplified, individuals and businesses began to emerge from the shadows.
The government projected that it would maintain its current level of
revenues despite the cuts in tax rates. It did even better: Tax
collections soared by 36 percent, shrinking the budget deficit by 93
percent in the first quarter of the new fiscal year.

The country is beginning to see a dramatic increase in foreign direct
investment. The New York Times, for instance, has dubbed Slovakia the
"Detroit of Europe" because of the recent contracts for new facilities for
Hyundai-KIA and Peugeot. These agreements will bring billions of dollars
of investment to Slovakia for new manufacturing plants that will employ
thousands of Slovakians. By attracting businesses with its very
competitive tax system, Slovakia hopes to become a beachhead for
capitalism's spread across central and eastern Europe.

When international automakers signed billion-dollar agreements to relocate
manufacturing facilities to Slovakia, the nation proved it had embarked on
the same kind of journey that had transformed Ireland from an economic
laggard into the economic dynamo it is today.

In drastically lowering taxes, Slovakia and its fellow Baltic states will
likely follow in the footsteps of Ireland, which has become the economic
model for many central and eastern European counties. Decades ago, Ireland
adopted an aggressive corporate tax-reduction policy in order to attract
investment and serve as a platform for businesses targeting Continental
Europe. Many American companies saw this English-speaking island as an
ideal jumping-off point for their business invasion of the rest of Europe.
Ireland cut business taxes. In the 1980s, to counteract an economic slide,
it cut taxes, especially on personal income, even more. It worked. Ireland
earned the nickname "Celtic Tiger" as a result of its ability to attract
foreign investment and market itself as a location where corporations
could thrive. Ireland has had a long, troubled history with Britain.
However, it has now achieved the best revenge: Ireland's per capita income
is higher than that of Great Britain.

Remember, taxes are a price. By reducing tax rates, Slovakia rewards and
encourages more productive work, risk-taking and success. Slovakia is now
enjoying more job creation as its economic growth tops 5 percent a year-a
miracle level by western European standards. Its success in making the
transition from communism to free markets is making Slovakia a poster
child for economic reform. President Bush, who has pledged to reform the
U.S. tax code, publicly praised Prime Minister Mikulas Dzurinda for his
reforms.

During their February 2005 meeting in Bratislava, Bush, without prompting,
made a point of touting the flat tax:

"I complimented the Prime Minister on putting policies in place that have
helped this economy grow. . . the president put a flat tax in place; he
simplified his tax code, which has helped to attract capital and create
economic vitality and growth. I really congratulate you and your
government for making wise decisions."

The Slovaks still smart from being regarded as poor, backward cousins to
the Westernized and supposedly more sophisticated Czechs during the days
of the Czechoslovakian union. As the Irish did with the English, the
Slovaks are determined to turn the tables. Success is indeed the best
revenge.

Slovakia has chosen a course of action that will enable it to become a
vibrant state in the twenty-first century's global economy. The World Bank
ranked Slovakia as the most successful nation among those implementing
reforms in 2003. The World Bank's report on "Doing Business in 2005,"
placed Slovakia among the top twenty nations in the world for ease of
doing business.

Because of their flat tax reforms, Slovakia and other "transition" nations
new to the European Union have become fierce economic competitors. Their
success is eliciting accusations of unfair play from established nations.
Germany and France are accusing Slovakia and other tax-smart countries of
creating tax havens and subsidizing their low taxes with EU aid money.

Yet beneath these accusations are the stirrings of reform. As they call
for more equitable "tax harmonization" within the union, Germany, France,
and others are ever so slowly inching towards serious consideration of the
flat tax. In Germany, Chancellor Gerhard Schroeder is leading the charge
in brow-beating Slovakia, Estonia, Lithuania, and Latvia. Germany's
burdensome tax regime smothers economic growth, and its corporate tax rate
is twice that of Slovakia. Yet at the same time, forces within the German
government, particularly in the finance ministry, are seriously studying
the flat tax reform. Moreover, Chancellor Schroeder reluctantly announced
that Germany would reduce its corporate tax rates to avoid losing more
businesses to neighboring, lower-tax countries.

France is also critical of the low taxes in transition states such as
Slovakia. France's former finance minister, Nicolas Sarkozy, hammered
eastern and central European nations over their tax cuts while in office.
He even proposed eliminating the EU subsidies that support economic
development in the new EU members. Sarkozy demanded that if tax cutting EU
nations were "rich enough" to avoid sky-high tax rates, then they should
not expect EU development money.

Isn't this a little hypocritical? The French, of all people, are masters
at attracting foreign investment. The Wall Street Journal reported that
France offers "a dazzling array of tax benefits" to lure foreign
businesses. Yet Paris can't understand that tax reform is also an
essential part of the recipe for a vital economy. Instead the country
keeps adding more special provisions that further complicate its tax code.
Since France offers specific incentives for foreign investment, why
doesn't it just go with across-the-board tax simplification?

While the winds of reform are blowing, Germany and France continue to
suffer for their reluctance, to date, to make needed tax reforms.
Bureaucracies that think they are dependent on overburdened taxpayers for
survival cannot tolerate the competition from agile, adaptive nations like
Slovakia or Ireland. EU bureaucrats in Brussels, prompted by Paris and
Berlin, constantly pressure Ireland to substantially raise its taxes. But
the Emerald Isle refuses-and enjoys more and more prosperity.

Regards,

Steve Forbes