IRIS Exclusive: All Flat Tax Countries Experiencing Explosive Growth Rates

I believe this is one of the biggest pieces of economic news ever. Milton Friedman's single-postcard flat tax idea has finally started catching on (ten Eastern European countries, with four more in Europe close to adoption). 2004 GDP growth rates there averaged a staggering 8%, well over twice the industrialized nations' average of 3.4%. Of course these flat tax rates vary widely, from 12-33%. Among the six lowest-taxed countries, growth rates are the highest: 8.6%. The lowest-taxed three have 9.5% growth.

Georgia (12% tax rate, 9.5% growth-est.)
Russia (13% tax rate, 7.1% growth)
Ukraine (13% tax rate, 12% growth-est.)
Serbia (14% tax rate, 7% growth)
Hong Kong (16% tax rate, 8.1% growth)
Romania (16% tax rate, 8.1% growth-est.)
Slovakia (19% tax rate, 5.3% growth-est.)
Estonia (24% tax rate, 6% growth-est.)
Latvia (25% tax rate, 7.6% growth-est.)
Lithuania (33% tax rate, 6.6% growth-est.)

Earlier I discussed the most successful of Milton Friedman's ideas--the volunteer military. The flat tax idea certainly has the potential to be similarly successful if democracies can summon the moral courage to resist the natural inclination to legally confiscate their wealthy neighbors' money through the coercive power of government. Note that this extraordinary success was achieved through adopting one element of economic freedom. Adopting many of these components as I have illustrated here would unleash economic energy of unprecedented proportions.

Update: Andrew Sullivan and many others have linked to this post and are debating the issue now.

Update 2 (October 11):

This topic has stimulated a large emount of blogosphere debate. The majority of criticism fits into the following categories:

?It?s easy to expand quickly when you?re small and recovering from communism. You have nowhere to go but up.?
If only this had been so obvious to the many pessimistic reporters who covered the fall of the Soviet Union.

If this claim were true we would expect to see similar growth rates among other small economies, particularly from the former Soviet Union. It may be the case that free-market reforms are so widespread in that region that the flat tax in itself makes little difference in economic growth. I will post these results later. Incidentally there is one notable exception in this list: the highly developed economy of Hong Kong.

?Cause and effect are reversed here. The overall free-market attitude which caused the flat tax to be adopted is what is driving the rapid growth.?
This is certainly a reasonable caveat of most studies involving human behavior in that cause and effect are hard to separate. The study was not prospective, i.e. the countries were not selected to have a flat tax randomly imposed. The conclusions of this study are that the flat tax should be enacted in an atmosphere of comprehensive free-market reform.

?The amount of data is too small.?
I wholeheartedly agree that this experiment needs to be carried out on a much larger scale as soon as possible. Interestingly there are reports that Germany?s new Chancellor, Merkel, supports the flat tax.

?What does the flat tax have to do with a blog on Israeli security??
Please see this FAQ.

Update 3: The critics were correct: these numbers are not compelling given that the entire area appears to be experiencing extraordinary growth. I ran the numbers on the non-flat tax countries of the former Soviet Union and there is only a slight (0.3%) advantage to the flat tax group. This difference is probably not statistically significant given the weakness of the underlying reporting mechanisms.

These results certainly appear promising, particularly for a developed country like Hong Kong. But it is too early to attribute systemic economic gains to one factor in the free-market palette.