Until this week, it seemed like a tax revolution was sweeping across Europe, from east to west, and possibly headed straight for North America.
This was supposed to be the coming-out year for the flat tax, a radical reform in which everyone pays exactly the same rate, with no loopholes or exemptions. Conservative economists watched with glee as the formerly fringe concept became national law in a dozen countries from Russia to the German border. Politicians and editorialists in Canada, the United States and Britain have been feverishly endorsing the concept and predicting its adoption in the wealthy nations of the West.
But this week, to the surprise of many economists, the flat tax seems to have met its fate under the heavy wheels of the German electoral steamroller.
Angela Merkel, the conservative candidate whose Christian Democratic Union had been favoured to win the tightly fought national elections on Sunday, has suddenly plummeted in the polls -- and most observers blame the flat tax.
While Germans, battered by a weak economy and unemployment rates well above 10 per cent, at first seemed to welcome her economic-reform proposals, their enchantment ended abruptly. As soon as a 25-per-cent flat tax was mentioned last week by Ms. Merkel's outspoken economic-policy adviser and candidate for finance minister, professor Paul Kirchhof, the seemingly unassailable Christian Democrats began falling in the polls.
Yesterday, polls for the first time showed Social Democratic Chancellor Gerhard Schroeder and his left-leaning allies in a dead heat with her conservative coalition. Her colleagues turned on her yesterday, telling reporters that Mr. Kirchhof's economic ideas have poisoned the campaign.
Mr. Schroeder yesterday used his famous street-fighting skills to attack Ms. Merkel for the concept, calling it a "tax for millionaires" and "the Merkel minus" because it will eliminate middle-class tax benefits for education, child care and housing, and dramatically cut the top tax rate.
So dramatic has been Ms. Merkel's fall from grace that tax experts are now saying that, if she loses the election on Sunday night, the flat-tax concept will effectively be dead in the Western world.
"The flat-tax concept has been discussed seriously by more governments in the past year than it ever has before -- but a lot of it will depend on what happens in Germany this weekend," Stuart Adam, a senior research economist with the Institute for Fiscal Studies, said in an interview yesterday. "A negative vote will probably prevent any other wealthy nation from bringing up the idea any time in the foreseeable future."
There is a big difference, some economists note, between the way a flat tax is perceived by middle-class voters in the comparatively poor new democracies of the east, and in the well-off welfare states of Western Europe and North America.
"In the West, this is often seen as letting the rich pay less tax than they did before," Mr. Adam said. "In the poorer countries of the East, it is seen as making the rich pay any tax at all, which they didn't do before . . . So it may never be popular in rich countries."
The movement began in 1994, when the government of Estonia, desperate to rebuild an economy after communism's fall, decided to adopt an idea that had previously been the preserve of academic economists and fringe politicians. Shortly after introducing a flat tax, Estonia's economy boomed. Fellow Baltic countries Latvia and Lithuania soon followed, succeeded by Russia in 2001 with a flat tax rate of 13 per cent. The last two years have seen a tidal wave of flat-tax conversions: Serbia, Ukraine, Georgia and Romania have outdone one another to introduce lower rates, and Greece, Hungary, Poland and the Czech Republic are in the midst of flattening their taxes.
In Britain, the opposition Conservative Party endorsed the idea this year. It has a strong backing within the U.S. Republican Party, and at least one major newspaper in Canada has used its editorials to campaign for it.
But it seems drowned in its efforts to cross the Oder river, Germany's eastern boundary. Two years ago, Mr. Kirchhof gave the concept his most enthusiastic backing: "Each person only has to pay 25 cents out of each euro earned. With the rest, he is set free in the garden of liberty." Yesterday, as Ms. Merkel's party openly discussed sacking him, that garden must have seemed fraught with snakes.
Down to the wire
While Gerhard Schroeder's Social Democrats trail Angela Merkel's Christian Democrats in the polls, the parties' chances of forming the next government after Sunday's vote are about equal when their coalition partners are figured in.
Chancellor Gerhard Schroeder's Social Democratic Party loses a state election in North Rhine Westphalia to Angela Merkel's Christian Democrats. The result is interpreted as a desire for fresh national leadership.
July 1: In a controversial move, Mr. Schroeder calls and deliberately loses a no-confidence vote to trigger an election for Sept. 18, one year ahead of the regular date.
July 15: Leading opponent Ms. Merkel unveils her economic and political manifesto.
Aug 4: She confuses net income and gross income in interviews.
Aug 10: A senior member in Ms. Merkel's party alienates East German voters by stating: "I simply won't accept that voters in the east get to decide who becomes chancellor. ... We can't let the frustrated decide the country's future"
Aug. 17: Ms. Merkel appoints flat-tax proponent Paul Kirchhof to campaign, raising fears of economic reforms.
Sept. 4: Mr. Schroeder and Ms. Merkel meet in a head-to-head debate. Although most commentators gave the initial edge to Ms. Merkel, who had surprised observers with her fluency and consistency, polls soon showed that the general public ranked the media-savvy Mr.Schroeder the class winner.
Angela Merkel's Christian Democrats/Christian Social Union: 46%
Gerhard Schroeder's Social Democrats 30%
SOURCE: ALLENSBACH, FORSA, FORSCHUNGSGRUPPE WAHLEN, INFRATEST DIMAP, TNS EMNID