# **7. CONCLUDING OBSERVATIONS**

44. Among EU8 countries, the Baltic countries were the first to introduce a flat rate personal income tax system,<sup>20</sup> starting with Estonia (1994), Lithuania (1994), and then Latvia (1997), while Slovakia also followed suit in 2004. While Hungary, the Czech Republic, Slovenia, and Poland continue to implement a multi-rate tax system, several political parties in these countries have announced that introduction of a flat-rate tax system is an important element of their political platform, and the pros and cons of the introducing such a system are the subject of considerable public debate.<sup>21</sup> While the main motivating factor for introducing flat rate taxes has been a desire to simplify the tax system and lower tax rates to spur investment and growth, opposition against their introduction in many countries has tended to mainly be on equity grounds, as opponents argue that phasing-out the existing multi-rate tax rate structure would adversely impact the progressivity of the taxation system.

45. The findings of this paper show that direct taxes in all EU8 countries, including those that have a flat-rate tax system, are very progressive in nature. Moreover, a comparative analysis of the relative contributions of the tax and benefit system to the overall decrease in income inequality within the country shows the taxation system in flat-rate tax countries (i.e. Estonia, Lithuania, and Slovakia) in fact contributes a larger share of the overall decrease in income inequality attributable to the national tax and benefit system than in other EU8 countries (i.e. Slovenia, Poland, Hungary, and the Czech Republic – see Chart 10).<sup>22</sup> Further analytic work is needed to better-understand whether the

**Chart 10. Contribution of tax and benefit systems in reducing income inequality**

<!-- Start of picture text --> Tax system Benefit system<br>100%<br>80%<br>60%<br>40%<br>20%<br>0%<br>Slovenia Poland Hungary Czech Estonia Lithuania Slovakia<br>Republic<br><!-- End of picture text --> _Source:_ World Bank staff calculations based on data from the 2006 EU Survey of Income and Living Conditions 20 A flat rate tax is a tax system with a constant rate applied to household income, typically with income below a statutorily determined level (that in turn depends on household demographics) exempt from taxation. 21 For instance, Prime Minister Donald Tusk in Poland was recently quoted as saying that the ruling Civic Platform hopes to introduce a flax-tax by 2011 (Reuters, 29<sup>th</sup> April 2008); while Hungary’s Socialist Party has consistently opposed the idea of a flat tax, a number of opposition parties are in favor of its introduction; when simplifying the tax code in Slovenia in 2006, the government eventually dropped the idea of introducing a flat tax rate in the face of strong political and public opposition. Finally, while the Czech Republic operates a progressive-rate tax system of individual taxation that differs from the flat-tax rate in neighboring Slovakia, the government has continued lowering the amount of tax paid by individuals through introducing a series of tax cuts since 1999.

22 Among EU15 countries, the relative contribution of the national benefits systems are generally a bit lower than in the EU8 countries, and vary from a high of 46 percent in Belgium to only 27 percent in the United Kingdom.