“The spirit of a people, its cultural level, its social structure, the deeds its policy may prepare—all this and more is written in its fiscal history.”

As interest in the flat tax grows, the world seems transfixed on an unlikely country, Slovakia, whose 3-year-old tax reform program is paying early dividends. Essentially applying a uniform tax rate on citizens (and sometimes companies) regardless of income, countries that have adopted a flat tax are presently clustered in Eastern and Central Europe. But it is Slovakia—with its 19% flat rate—that has captured the world’s attention of late, says HBS professor Laura Alfaro. Why? The case, “Rovná daň: The Flat Tax in Slovakia,”, co-authored by HBS professor Laura Alfaro, Europe Research Center Director Vincent Dessain, and Research Assistant Ane Damgaard Jensen, describe how the flat tax was introduced there in 2004 as well as the surprising influence of Slovakia ever since. The flat tax is an idea that’s burst to life in post-communist Eastern and Central Europe, especially in Slovakia. But is the rest of the world ready? 

What is a flat tax, what does it aim to do, and why can it be controversial?
A flat tax is as an income tax; it basically applies the same rate of tax to everyone and to each component of income. As opposed to a progressive tax system, which has the average tax rate increasing with the level of income, a flat tax doesn’t distinguish between different levels of income. Wealthy, middle class, or poor, you pay the same rate. For this reason, many economists advocate including a tax exemption at the bottom in order to protect the groups earning the least. Nevertheless, opponents claim that a flat tax is likely to redistribute more of the tax burden from the rich to the middle classes. The fairness issue is very important in this case. It is not easy to say what “fair” is, but a “fair tax” is one that guarantees a socially desirable distribution of the tax burden, which is of course shaped by the views and beliefs of a country.

 Slovakia introduced a flat tax in 2004 with a 19 percent rate on personal income, corporate income, and value added tax. What are some of the complexities of the Slovak situation that made you decide to highlight it as a case?
Slovakia previously had a tax system that wasn’t particularly supportive of the business environment: It was complicated and distortive, consisted of several rates, and included numerous exemptions and deductions. Former Finance Minister Ivan Mikloš wanted a simple, neutral, and non-distortive system. The system that was created had no special rates, no exemptions, no exceptions, and almost no deductions. Slovakia had implemented one of the most simple, neutral, and effective systems in the world that improved the business environment, reduced tax evasion and, in connection with other reforms, brought about high and sustainable economic growth.

What do you think it would take for the idea of a flat tax to gain ground in the U.S. or Western Europe? In spite of these examples of tax reduction, there is a long way to go from lowering tax rates to introducing a flat tax in the U.S. or in Western Europe. This would require a change of attitude in countries marked by a substantial history with progressive taxation. The argument that a flat tax is likely to be paid by the middle classes is probably one reason why the concept has yet to gain ground in the U.S. or in Western Europe; the middle class simply doesn’t want it.

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