On Monday the 12th, the Royal Swedish Academy of Sciences announced that Robert E. Hall of Stanford and Michael Woodford of Columbia will share the Nobel Prize in Economics “for the microeconomic foundations of macroeconomic stabilization.” It is a well-deserved award. When the Keynesian prescriptions of the 1970s promised lower unemployment but delivered higher inflation, both men helped rebuild macroeconomics based on how households and firms make decisions.
However, the prize overlooks the idea from Hall that has done the most for taxpayers around the world. In December 1981, together with his colleague at the Hoover Institution, Alvin Rabushka, he published a proposal in The Wall Street Journal that sounded almost naive: tax all income just once, at a single, low rate. They later turned it into the book “The Flat Tax”. The rate was 19 percent, and the tax return should fit on a postcard.
It was only after the fall of communism that the idea found a home. Estonia adopted a flat tax in 1994; Russia followed in 2001, Slovakia in 2004, and Georgia in 2005.
In recent years, Argentina has demonstrated that fiscal order is possible. But balancing the books says little about how they are filled. Between the federal government, provinces, and municipalities, Argentines face more than 150 taxes. Income tax evasion hovers around 50 percent, and the resulting revenue loss amounts to between 4 and 5 percentage points of GDP per year.
Anyone starting a small business today needs an accountant before they need a customer. Their larger competitors pay specialists to navigate the maze; those in the informal sector simply ignore it. As my colleague Marianela Mendoza says, “Tax complexity punishes those who produce and subsidizes tax evaders.”
Hall and Rabushka, Argentine edition
That is why the Fundación Internacional Bases and Somos Innovación have been working on a flat tax for Argentina. Our policy paper, led by Horacio Arana alongside Marianela Mendoza and the author of this article, adapts the Hall-Rabushka model to a federal country:
- A flat rate of 15 percent for individuals and businesses.
- Income is taxed only once, at the source, with no double taxation on savings and investment.
- Full deduction for investments in the year they are made.
- Municipal taxes limited to services actually provided.
What Argentina Stands to Gain
First, higher tax revenue with a lower tax rate. When the tax rate is low and the rules fit on a single page, tax evasion ceases to be profitable. If Argentina were to bring its tax evasion rate in line with Chile’s – which is close to 25 percent – it would recover between 2 and 2.5 percentage points of GDP per year: roughly the amount currently allocated to infrastructure. Without raising a single tax.
Second, investment. Argentina doesn’t lack talent, land, or energy. It lacks capital – and capital is notoriously skittish when faced with tax codes so complex they require a lawyer to read them.
Third, fairness: the same rules for everyone, without special regimes negotiated in some ministerial backroom. The eleven countries we analyzed show the same pattern: greater simplicity, higher tax revenue, less tax evasion, and more foreign investment. Georgia, for example, quadrupled its tax revenue. Estonia increased its tax revenue by lowering the tax rate.
Isn’t this a gift to the rich? Hall and Rabushka heard this objection more than a thousand times, and their response still stands. It is precisely the rich who can afford to exploit the loopholes in a complicated tax code; the grocery store owner in Rosario cannot. A high tax rate that half the population doesn’t pay is progressive only on paper.
An Award Worth Honoring
The Swedish Academy honored Hall for teaching central banks how to stabilize an economy. Argentina could honor him in a more practical way: by adopting the idea that he and Rabushka put on a postcard 45 years ago.
Medals are fine. Reforms are better.
* Federico N. Fernández is a visionary leader dedicated to driving innovation and change. As the CEO of We Are Innovation, a global network of over 50 think tanks and NGOs, Federico champions innovative solutions worldwide. His expertise and passion for innovation have earned him recognition from prestigious publications such as The Economist, El País, Folha de São Paulo, and Newsweek. Federico has also delivered inspiring speeches and lectures across four continents, authored numerous scholarly articles, and co-edited several books on economics.
Source: We Are Innovation
