greater share of the payment burden. The welfare states of Western Europe also fear a
race to the bottom, as countries compete for mobile international investment by offering
ever lower tax levels and, thus, greater return to that investment. Additionally, it was
believed that a flat tax would create marginal disincentives to work and invest (Romich,
2006).
But what was deemed impossible in the entrenched welfare states of Western Europe
seems to have become an imperative in the fluid context of economic transformation in
the East. Estonia was the first to introduce a comprehensive tax reform in 1994, together
with a flat tax of 26 percent. After his election victory of 1992, the then-32-year-old
Mart Laar led his conservative-liberal coalition to push through many difficult shock-
therapy reforms, guided by an extremely liberal economic outlook. Ignoring IMF advice
to increase taxation levels in the existing system of graduated tax rates, Estonia instead
implemented a flat income tax of 26 percent. In the words of Laar, “Especially in a tran-
sition country, where the economy has to move from a fully government-controlled system
to a market-based one, it is very important to free the private initiative and give freedom
of action to create economic value. The government must not punish entrepreneurial
people; it has to encourage them, also through the tax system. The government must
ensure fair play only.”7 Estonia was swiftly followed by Lithuania and Latvia in their
fiscal reforms the following year.
In 2001 the newly minted government of President Vladimir Putin of Russia replaced
the previous three-bracket system with a top rate of 30 percent, with a low flat rate of 13
percent flat personal tax, followed by a 24 percent corporate tax in 2002. Russia has long
suffered from widespread tax evasion and the new simplified tax system aimed at making
7 “The Cradle of the European Tax Rebellion: Estonia,” TSC Daily, 13 Oct 2004.