Monday, November 26, 2007

LAFFER CURVE IN MONTENEGRO

Last year, Montenegro's parliament adopted a 15 percent flat tax on personal income. Tax rate on corporate profits was set at 9 percent and by 2010 Montenegro will have a 9 percent flat tax rate on corporate and individual income (link).

As a result of an expanded tax base and lower tax rate on productive behavior, Montenegro's Tax Administration has collected 36 percent more from annual taxes than in 2006 (here and here).

2 comments:

Dr. T said...

Tell the Left in the U.S. that and they will say that that only works in Montenegro. Taxes for them is all about social engineering, not raising money -- or else they would happily embrace these policies.

Rocks said...

Tax rates indeed strongly affect labor supply. Labor supply is, on the other hand, very elastic and any kind of reduction in the price of labor stimulates the labor productivity by more than the relative size of reduction in labor price.

I often read that U.S. politicians defend minimum wages though the idea about the minimum wage can be easily rejected on economic grounds. In addition, minimum wage is an extra-tax which employers have to pay.

Montenegro's case for tax reform has worked very well. In fact, Montenegro's economy is booming. Not just because of catch-up effects but also due to significant pro-growth economic reforms. And Montenegro's economic growth is non-inflationary stimulated by low government spending and sound public finance.

Additionally, Montenegro is a beautiful southern Adriatic coast; one of the most beautiful parts of the Adriatic area with places such as Budva, Tivat and Kotor, worth a visit.

Regards,
Rocks