Anyone interested in seeing first-hand what a simple and fair tax system can help accomplish should visit Estonia. After gaining independence from the Soviet Union in 1991, the little Baltic country first tried its luck with the kind of progressive tax system so popular in the West. Productive people were punished with higher tax rates, and savings and investments - the lifeblood of future prosperity - were subject to double-taxation. Not surprisingly, Estonia did not prosper. To be fair, the tax system was just one of many problems plaguing the nation. But it was ironic that Estonia hindered its economic recovery from communist enslavement by using a fiscal regime - progressive taxation - advocated by Karl Marx. No less ironic is the fact that most capitalist economies have adopted that counterproductive taxation model as well.
Seeking a new approach to jump-start its economy, Estonia adopted a 26% flat tax in 1994 and never looked back. Combined with other free-market reforms, the flat tax has helped Estonia become one of the world's fastest-growing economies. Tallinn is now a boom town, filled with expensive cars, elegant shops, trendy restaurants and new construction. Estonia's system is not a completely pure version of the flat tax model. But it is remarkably free from distortions, exemptions, loopholes and penalties. The flat rate applies to both personal income and business income. And since one of the key principles of a flat tax is that income should be taxed only once, there is no death tax, no wealth tax and no double-taxation of savings or dividends.
With such a simple and fair tax system, it is hardly surprising that Estonia is now the Baltic Tiger, growing faster than every other post-Soviet economy. In the last six years, growth has averaged nearly 9%. And that's after adjusting for inflation.
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