Ask Albania

Worth A Look, Taxation, Frontier Centre

For a lesson in pro-growth tax policy, may we suggest gazing east, to Albania. This small Balkan country is about to halve its personal income-tax rate, starting August 1, to a flat 10%. The corporate rate is slated to drop to 10% in early 2008.

Albania’s flat tax is the latest sally in the intramural tax competition fueling growth in the former communist bloc. It began with Estonia in 1994 — then-Prime Minister Mart Laar had read Milton Friedman’s “Free to Choose” — and has since extended to a dozen nations.

Political leaders, such as Albanian Prime Minister Sali Berisha, are aware of the example they’re setting. When Parliament approved the most recent tax cut — made in response to lowered rates in neighboring Macedonia — Mr. Berisha cheered that “the fiscal revolution” will proceed even “faster than forecasted.”

Indeed it may: The Czech government has announced that a flat 15% tax next year is “a certainty.” And Montenegro plans to reduce both income and corporate taxes to a flat 9% by 2010.

The Adriatic Institute for Public Policy, a think tank based in Croatia, has found that governments that adopt flat-tax regimes see either steady or increased revenues within the first year.

For Western Europeans, the success of their neighbors’ low, flat taxes can be seen piled on their very own freight trains. In the first quarter of this year, the euro zone — dominated by France, Germany and Italy — for the first time sold more goods to the 11 new Central and Eastern European EU members than to the U.S. Old Europe has these new customers in large part because New Europe is getting its fiscal policy right. Both would be richer if the West took a good look at the flat tax, too.