A Flat Tax for Iraq
April 21, 2003
With the end of war, a key issue will be the Iraqi tax system. Under Saddam Hussein, sales from the state-run oil monopoly provided all the revenue that the government needed for what little it did. The interim authorities will need revenue to pay for police, firefighting and other basic services. Hence, a tax system will need to be put in place quickly.
Russia faced a similar situation after the fall of the Soviet Union. Although the old Soviet Union had a tax system, it existed to control inflation rather than provide government revenue or to change the distribution of income.
The Russian government, under extreme pressure from the International Monetary Fund to raise revenue in order to get inflation under control -- the central bank was just printing money to cover large deficits -- raised tax rates, imposed many new taxes and put extreme pressure on tax evaders.
- As a result, tax revenue fell to just 8.6 percent of the gross domestic product in 1998, from 11.1 percent in 1995.
- In 1996, the IMF suspended its program in Russia because its tax revenues were too low. In effect, the IMF wanted Russia to raise taxes still more.(See the figure.)
- Instead, the Russians replaced the whole system, effective January 1, 2001, with a 13 percent flat rate tax on individual incomes, slashed tax rates on corporations and abolished many taxes.
- Contrary to IMF predictions, revenues under the new system shot up -- rising to 16.2 percent of GDP in 2001, almost twice what they had been 3 years earlier with much higher tax rates. (For more information, http://www.russiaeconomy.org.)
Leaders of the new Iraq are said to be looking at a flat rate tax system for their country, according to an April 14 report in Tax Notes.
Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, April 21, 2003.
Browse more articles on International Issues