Traps of the flat tax in emerging countries

Abstract

Adopting a flat tax regime continues to be of interest for the policy makers in the emerging countries. The decreasing of the fiscal administration costs and the potential increase of the FDIs (Foreign Direct Investments) are the main attractions of this system. This paper states that adopting the flat tax cannot be but a “hit and run” type strategy, because this measure can be applied on a short term only. We will prove, with theoretical and practical arguments, that the emerging countries will face severe economic and social disequilibriums in the absence of a measures-mix accompanying the implementation of the flat tax. We propose solutions in order to avoid the traps of the flat tax set for the emerging countries. Key words: Flat tax, tax reform, twin deficits, finance sustainability.