I was in Copenhagen yesterday, speaking at the CEPOS conference to launch flat tax onto the Danish agenda. It was a first class affair, and included a presentation from Denmark's Taxation Minister, Kristian Jensen, pictured (left) with myself. Mart Laar, former PM of Estonia, and who launched Europe's first flat tax, also featured.

Several people wanted to know if flat tax was only suitable for relatively undeveloped, former communist economies. George Osborne, UK Shadow Chancellor, has raised the same point. The answer is that it will work in advanced economies, but where undeveloped economies in new Europe have made gains by curbing widespread tax evasion in the black economy, the Western countries will gain by curbing the need for tax avoidance, the legal but widespread tax sheltering which goes on.

Flat tax came to new Europe first because it is politically easier to do there, not because it is more appropriate economically. The Eastern states do not have the long history of entrenched interest groups influencing the democratic process. Politicians in countries with a longer democratic tradition have to be careful in taking on groups which perceive benefits to themselves from the progressive tax system. Some see advantages in the exemptions and allowances which characterize such systems, and fear they might lose out.

It takes political skill and leadership to bring flat tax to sophisticated economies. Once they do it, however, it will work just as well there, if not better. The advanced economies suffer the adverse effects of high tax rates because those rates are enforced, and therefore have much to gain when they are lowered to a single flat rate. The incentive boost to economic activity is probably higher in a more developed economy. And since they have other factors which make them attractive to investors, including clear property rights and business law, the move to a low flat tax increases their attractiveness to foreign investors.

Flat tax becomes politically easier as more countries introduce it. As it spreads from the Baltic states through Eastern Europe, and is taken up by major countries such as Poland, the competitive pressure is felt to keep other countries attractive to enterprise and investment. CEPOS yesterday took a big stride for Denmark and for Europe.