A flat tax regime is more favorable for those who have higher income. While with such a system taxation processes are simplified, the ultimate outcome is that tax rates for those with high income are reduced, says Dragan Tevdovksi in an interview to Epress.am during the “Taxation, Justice and Economic Development” international conference held in Armenia on February 12, 2019.
In 2007, the newly elected right-wing government of Macedonia (Northern) made a transition to the flat tax. The justification was that it was being applied in many European states and that allegedly the tax calculation was becoming easier for the state, in addition to the expected GDP growth. Only a decade later, in 2019, Macedonia returns back to progressive taxation.
“The flat taxation regime caused a very big income inequality. It also resulted in public revenue reduction and we became the most unequal country of Europe. That is why we have returned back to progressive taxation, the aim of which is to generate more budget revenues in order to be able to direct them to development of such sectors as education, health and social security,” says Dragan Tevdovski. He also emphasized that several other countries in Europe, such as the Czech Republic, Slovakia, Albania, Latvia, Montenegro shifted back to progressive taxation regime.
The Government of Armenia plans to transition into flat taxation. The current system for income taxation is a three-tier system with rates of 23% (for up an income up to 150.000 AMD), 26% (for an income between 150.000 and 2 mln AMD) and 36% (for an income above 2 mln AMD). The new draft law proposes flattening the rates to a unified 23%, which is planned to drop to 20% by 2023.
The proposal has received numerous criticisms, specifically as it entails relocation of the tax burden from the rich minority to poor majority. Flattening the tax rates widens income inequality and contributes to social injustice. The unacceptably wide social polarization in Armenia will further widen as a result of adopting these amendments.