Effect of flat rate income tax in selected EU member states on their economic growth

The idea of flat income taxes is frequently supported by economists and politicians, but has never been implemented in any western liberal democracy yet. However, the introduction of a flat rate income tax has become a trend in the transition economies of Eastern and Central Europe. There are several advantages of flat income taxes over its progressive counterpart. Complicated income tax system is simplified, which is not only convenient for citizens, but a positive impact on economic competitiveness makes the country more attractive for foreign investors as well. The main counterargument of the opponents is that the introduction of the flat tax rate significantly reduces government revenue. From current EU member states, Estonia and Lithuania introduced the flat rate income tax in 1994, followed later by Latvia, Slovakia, Romania, Czech Republic, and Bulgaria. The last EU member state that so far adopted the flat rate income tax is Hungary (in 2011). However, the Czech Republic and Slovakia replaced the flat tax rate with two income tax rates in 2013 and Latvia with three income tax rates in 2018. In our contribution, we examine whether the introduction of the flat income tax rate in Hungary influenced the economic growth of the country. Using the difference-in-differences method, we demonstrate that it had a positive effect on the growth of GDP per capita. On the other hand, we investigate if the replacement of the flat tax by the progressive tax in the Czech Republic and Slovakia in 2013 negatively affected the growth of GDP per capita