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Flat tax in the Caucasus
IPA REVIEW ARTICLE
‘We lost the twentieth century' was how Paata Sheshelidze described Georgia's experience of the Soviet occupation from 1920 to 1990.
Sheshelidze is President of the New Economic School in Georgia (NES), a free-market think tank in Tbilisi. I had met him and the NES Vice President Gia Jandieri at the Property and Freedom Society Conference in Turkey. The Democratic Republic of Georgia is a country that has been trampled on, over-run, ruled and occupied many times in its long history but has also had periods of independence and sovereignty.
But now Georgia's government proclaims as one of its goals to reduce the size of government as a share of GDP from 29 per cent to 20 per cent.
The twentieth century may have been ‘lost', in Sheshelidze's words, but it is visible. The pre-communist era Georgian architecture is charming and in a style that could probably be described as ‘West Asian'. But the Soviet architecture is strikingly unpleasant-blocks of flats built by the hundred, recalling NSW Housing Commission blocks at their worst. Soviet office buildings and factories are conspicuous by their ugliness. The seventy years of Soviet rule emasculated Georgia as a functioning country and community. The Soviet withdrawal left them with little on which to lean except for the people's skills, culture and resilience, and these too had been severely crippled, even more so than in Eastern Europe.
Many buildings and roads are in poor repair after the 70 year Soviet experience. With a low per-capita income-and thus low tax base-infrastructure construction and restoration lags.
Georgia is now a reasonably-well functioning democracy, firmly heading in a free-market direction. Much has been privatised in the last ten years and this privatisation continues. Despite the interference of EU busy-bodies and other international bureaucracies, Georgia has largely resisted their recommended regulations and remains determinedly free-market and low-regulation. According to the World Bank's Doing Business survey, Georgia is number 18 in the world and was the number one reforming country for 2007.
The Georgian government imposes just six relatively low taxes-a goods and services tax of 18 per cent, a flat personal income tax of 25 per cent (which is soon to be lowered to 15 per cent), a corporate income tax of 15 per cent, and low excise taxes which apply to fuel, tobacco, alcohol and tyres. It has almost no import duties, and some minor property taxes on land, buildings, and vehicles.
Importantly for economic development, the government levies no taxes on financial instruments; restricts no capital or financial transactions; and positively encourages business formation and investment. In Georgia, it is quick and easy to register a business and form a company, and there is no labour regulation.
As a result of this liberal taxation and regulatory regime, per capita income has gone from $200 in 1995 to $4,700-still low by international standards, but a remarkable increase. Real GDP growth in 2007 was 12.4 per cent. And its share price appreciation between 2004 and 2007 was 1,150 per cent.
Georgia eyes the low-tax, low-regulation Baltic Tigers (Latvia, Lithuania, and Estonia) and their economic progress with admiration and is seeking now to emulate and out-do them in libertarian governance. Lying on the old Silk Route and a natural trade route now between the ‘-stans' of central Asia, Georgia sees itself as a free-trade economy and safe financial centre for the region. Unfortunately, they are starting from a low base and a decayed culture of personal responsibility and trust.
As history has repeatedly shown, great free market revolutions do not happen by accident. The current Prime Minister is Lado Gurgenidze, a businessman who returned to Georgia when the Russians left. A telling indication of his philosophy is in the name of the stock-broking business he founded-‘Galt and Taggart Securities'-the names of Ayn Rand's main characters in Atlas Shrugged. And in a government document titled Looking Ahead, they expound ‘Compassionate Libertarianism'. Looking Ahead offers a very reassuring promise of reform and the implementation of free-market philosophies.
Sheshelidze and Jandieri at NES are intelligent champions of freedom and refreshingly libertarian. They are doing their best to inform and educate the policy-makers and ‘influencers' of not only their own country but also of their neighbours-Azerbaijan, Ukraine, and even Iran and Iraq.
Much has been said about the successes and failures of post-communist transition in Eastern Europe. But Georgia is determined to show how free markets can work, even after a century hindered by socialism.
As this editon goes to print, Russia has moved troops into South Ossetia, in Georgia’s north. Hopefully the increasing hostilities will not threaten the lives and prosperity of Georgians. - Ed.