Flat Tax Elections

Although not necessarily the deciding issue, the question of a flat tax was an issue in the just held parliamentary election in the Czech Republic and is also debated leading up to the Slovak elections on June 17.

It's really the success of the Slovak flat-tax reform with a 19 % income tax, profit tax and VAT that has changed the terms of the debate on the issue throughout large parts of Europe.

It was all of course started by Estonia in the early 1990's, and then followed by Lithuania and Latvia, but it was Slovakia that took the concept to Central Europe.

Mikulas Dzurinda and his centre-right government has been ruling Slovakia since 1998, being re-elected in 2002, and taking the country from an unreformed virtual outcast in Europe to one of its true star performers.

Its economy is booming with growth rates above 6% and with very rapid increases in industrial production and exports. Once sleepy Bratislava has suddenly become a very popular place. Its airport is emerging as one of the hubs for low-cost airlines.

This year Slovakia will produce more cars per capita than any other country in the world - it was only years ago that its main export effort was in old-style Soviet tanks.

But also the Czech Republic is doing very well with growth rates above 5% and also impressive developments in industry.

In the Czech election debate, centre-right ODS said it wanted to introduce a flat income tax of 15 % if it won, thus trying to give new momentum to the economic development of the country.

That election ended with ODS gaining 81 seats versus the 74 seats of the CSSD of the Prime Minister. But the centre-right bloc ended up together with 100 seats in the 200 seat Chamber of Deputies, thus producing a perfect tie.

It reminds me of the 1973 Swedish election. In 1970 we had introduced a new unichamberal system with 350 members, but no one had contemplated the possibility of the two "blocs" each getting 175 seats, which is exactly what happened.

Well, Sweden survived, although the quality of economic policy deterioated substantially in the years of parliamentary maneuvering that followed. We subsequently changed the constitution so that the parliament now has 349 members. Nations do learn.

Tomorrow President Klaus is likely to start some sort of talks with ODS leader Mirek Topolanek to see whether he can form a government. But how far such a government can carry its program - including the flat tax proposal - is of course a very open question.

In Slovakia the opposition party Smer - Third Way - is complaining heavily against the policies of the Dzurinda government, but as far as I understand their proposal for changes are rather modest.

On income tax, they will retain the 19% tax, although they will introduce an even lower bracket of 15% for low-income earners. And on VAT they will introduce differentiated VAT rates, with some higher and some lower.

The outcome is still open.

Smer is well ahead as an individual party in the opinion polls. But it is far from excluded that Dzurinda will manage to forge a new coalition of the different parties of the centre-right.

The flat tax model seems there to stay in Slovakia - and it might have been gaining ground in the Czech Republic.