The meltdown of Baltic countries shows what a bad idea this gimmick always was.

Over the last decade, Eastern European countries became darlings of the far right by instituting free-market economic policies designed to break convincingly from their Communist past. The so-called Baltic Tigers—Latvia, Lithuania, and Estonia—garnered worldwide plaudits for a number of free-market reforms, led by the imposition of a flat-rate income tax, especially from the American right. "The flat tax is making a comeback," trumpeted the conservative National Review. The three nations are "leading a global tax reform revolution," said the right-leaning Heritage Foundation.

The idea behind a flat tax is deliciously simple: Charge one uniform rate of income tax for all payers, regardless of their relative wealth. That, say its advocates, will end tax cheating and bring in higher revenues than the usual graduated tax system used in the United States and most other countries. Before the Eastern European "revolution," the loudest proponent of the flat tax was Steve Forbes, a former Republican presidential candidate and the editor-in-chief of Forbes. Of course, thus far American policymakers have not shown much more appetite for the flat tax than American voters did for Steve Forbes' candidacy, which is why the right was so excited that the idea took hold abroad.

Too bad for them that it hasn't worked out. Latvia, which has a flat tax of 25 percent, and Lithuania and Estonia, which have 21 percent tax rates, are all in deep economic trouble. They all have huge government budget deficits, a sign that they took in too little in tax revenue to cover their costs, primarily state expenditures to provide a generous welfare state. Conservatives might argue that they didn't slash welfare benefits enough, but there is no dispute that the flat tax didn't provide the expected revenue.

To be sure, they all had other problems as well: a sharp decline in exports to Western Europe because of the worldwide recession and huge borrowing in foreign currency to pay for a major real estate bubble that has now popped. "It turns out that Eastern Europe has now become the subprime borrower of Western Europe," said Bodgan C. Enache on the Web site Mises Daily. The Baltic countries are the most indebted in the region: Estonia's foreign debt represents 131 percent of GDP, Latvia's debt is 116 percent of GDP, and it's 72 percent for Lithuania.

That's partly why no one calls them tigers anymore. The crisis has hit Latvia the hardest. The Latvian economy fell by 10.5 percent in the final quarter of 2008 and its GDP is expected to decline by 12 percent in 2009. Riots broke out in Riga in January when demonstrators marched to protest the falling economy. The government was forced to resign in February. "The Latvian economy is staring into the abyss," said Neil Shearing, the emerging market economist at Capital Economics.

Latvia received a $10.5 billion bailout from the International Monetary Fund, the European Union, and Scandinavian countries last year, requiring the government to hold the budget deficit below 5 percent. But the newly installed prime minister, Valdis Dombrovskis, now says the government cannot meet the 5 percent hurdle and may be forced to ask for more financial assistance. "Given the pretty harsh economic situation there could be a possibility that Latvia would need more international loans and certainly one cannot exclude this," Dombrovskis said. The alternative would be more budget cuts, he said.