So after a summer of suspense and rumour, Latvia got its 2nd disbursement of $279 million on the IMF loan.  As is customary in these situations, one must read between the lines but it appears that the IMF and the European Commission have agreed to let things play out as they are on the exchange rate, and thus despite IMF doubts about the peg-transition-to-euro strategy, it stays in place.

Instead, the Fund program has been revised to accommodate massive fiscal deterioration for 2009 (a difference of 8% of GDP relative to the initial program), with the understanding that a Maastricht convergence path will have to begin in earnest in 2010 — and in particular with the December budget.

Whatever about rifts between the IMF and the EU, one rift that is sure to widen is that between the IMF and the Wall Street Journal, because among the things on the fiscal table is the supply siders’ beloved flat tax, which was seen as the key to the Baltic miracle when there was such a thing.  From the IMF press conference —

Question: I wonder if you could add to that. When you mentioned these enhanced revenue measures, what are you expecting and when? Can you elaborate, Anne-Marie, on the flat tax modification proposal?

MR. GRIFFITHS: The authorities are committed to increasing the real estate tax. They are working on that, and that is part of the measures. Then there are other tax increases they are considering as a fallback or as a last resort, and they are working very hard to take other measures and other structural reforms instead. We will work closely with them if taxes have to be increased, a progressive personal income tax and a possible VAT increase. We will work closely with them if it is needed, including at the technical level.

The implication been that the first port of call is a property tax — but can a property tax really be a big revenue source right after a bubble has burst?  If not, then the progressive income tax and VAT will get a look, and given the revenue needs of keeping eurozone membership on track, they surely will.  In fact, it was never clear what the magical properties of a specifically flat tax were as opposed to have a simple definition of the tax base and then progressive rates of taxation on it.  The supply siders tended to confuse the rate structure with the complexity that arises from the definition of taxable income.   In any event, it’s going to be tough to tell the Latvians that the roof will cave in if they alter their flat tax, since in a sense, it already has!