In a recent editorial in the Bermuda’s newspaper, The Royal Gazette, author Colin O’Connor wrote that “ONE of the gravest dangers that Bermuda faces is the widespread introduction of "flat tax" in developed countries.”

Mr. O’Connor cited the extraordinary complex tax codes in the US and the UK give innumerable reasons for tax advisers there to recommend incorporation of global holding companies in Bermuda, and in other no-tax or low-tax regimes such as Ireland, the Netherlands and Luxembourg.

O’Connor further stated that, if the major tax jurisdictions were shorn of that complexity, attractive jurisdictions such as Bermuda would disappear almost overnight. Up until now, such a prospect has been remote because international accountants and tax advisers, and their powerful corporate clients, have every reason to take advantage of impossibly complex tax codes by using low-tax jurisdictions.

But, as reported in a recent edition of the Wall Street Journal, senior economics writer Stephen Moore wrote that the flat tax "was an idea whose time has come".
Moore further pointed out that the proposed flat tax, which is the same tax rate for everyone without the deductions now complicating the tax code, had failed to catch fire in 1996 for Republican Presidential contender Steve Forbes. However Forbes, in his new book Flat Tax Revolution, was pleased to report that his idea has taken hold, but not as yet in the US.

In reviewing Forbes’ book, Moore wrote that "Ten nations, mostly from the former Soviet Union, including Russia itself with its 13 per cent rate, have embraced a flat tax. And the economies of these countries are reaping their reward: they far outpace crusty old Europe in GDP growth and job creation. China, Germany and Spain could be the next dominoes to fall."

Mr. Forbes argues that international competition seems to be pushing "the flat tax frenzy. Countries are increasingly recognizing that if they don't adopt the flat tax, they will wind up losing jobs, capital and their own ambitious entrepreneurs to more growth-friendly nations."

Forbes shows that, in virtually all of the countries having a flat tax, government coffers overflow with tax receipts.

In the meantime, the UK's Daily Telegraph reported that "whatever (UK Chancellor of the Exchequer) Gordon Brown says, the flat tax is coming. (It) is marching across Europe, just as other ideas have conquered the Continent every generation or so. This time, the revolution is being driven not by loathing of communism or some ancien regime, but by that mysterious magic of markets: competition. A flat tax regime has been adopted in 11 countries and counting. As each citadel falls, another is forced to respond to the new-found vigor of its neighbor."

Greece, which has an "unbelievably rickety public finances, (but) the hope is that a flat tax rate of 25 per cent will revive the moribund economy, reduce evasion, attract high earners and send revenues pouring into the coffers of Athens".

Germany is seen to be by the Daily Telegraph as "a far bigger prize for the flat-tax revolution". New Christian Democrat leader Angela Merkel, herself a product of the Soviet Bloc as a former East German, is now challenging Chancellor Gerhard Schroder, and is far ahead in the polls.

In fact, the European economist with the Bank of America stated that “with Merkel’s surprise move in naming Germany's flat tax guru, Professor Kirchhof, as her preferred choice for finance minister, she has regained the initiative and stirred up a healthy debate about tax reform. If Germany turned itself into the first major Western country to adopt a flat tax, it would probably become a much more attractive place for business investment in general."

Professor Kirchhof believes he can either slim down or scrap over 90,000 German tax rules and 418 tax exemptions, explaining "Each person only has to pay 25 cents out of each euro earned, with the rest, he is set free in the garden of liberty."

The UK's Gordon Brown is unenthusiastic about flat tax because he prefers the political control that the status quo provides, and recently released UK Treasury documents reported that his officials had dismissed the idea.

But a complete version of the Treasury research revealed that someone blacked out nearly all of the bits which showed that officials were actually quite impressed. "One of the Browned-out pieces even said there could be an 'economic mini-boom' if a flat tax were introduced." the Telegraph reported.

Although tax advisers need not go into mourning just yet, the writing may be on the wall. Mr. Forbes pointed out that the US income tax code with all of its attendant rules and regulations runs to nine million words, and this complexity is "estimated to cost the US economy $200 billion a year".

It could be that mainstream America has had enough of the status quo. An editorial, in a recent edition of the New York Times complained about the results of the "tax holiday" which allowed US companies to "bring profits held in foreign lands home in 2005", supposedly to help in creating new jobs. However, after repatriating over $14 billion on profits at "a measly tax rate of 5.25 per cent", which was an 85 per cent discount on the normal corporate rate, Hewlett-Packard announced it would lay off 14,500 workers in 2006.

" Dozens of other companies are also bringing billions home with no mention of new hiring," the New York Times complained. "Pfizer, which plans to repatriate $36.9 billion has, like Hewlett, announced lay-offs", expected to number about 10,000. Worse still, the tax holiday legitimates the gaping loopholes that let American companies amass profits abroad in tax havens like Ireland, Bermuda, Luxembourg and Singapore."

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