Monday, February 18, 2008

Success of the 13% Flat Tax in Russia

From the conclusion an NBER Working Paper "Myth and Reality of Flat Tax Reform: Micro Estimates of Tax Evasion Response and Welfare Effects in Russia":

The 2001 Russian flat rate income tax reform (flat rate of 13%, see chart above) has often been heralded as a success story and has been credited with large increases in tax revenues and an improved business climate. Although it has been difficult to differentiate between myth and reality with the Russian experience, many other transitional countries have followed suit with flat rate income tax reforms, and an increasing number of countries around the world are considering the adoption of a flat rate income tax.

In this paper we focus on the impact of the flat income tax rate on tax evasion, an issue that was, and continues to be, a major problem in Russia as well as in many other transition and developing countries. We argue that the flat tax reform was instrumental in decreasing tax evasion and that, to a certain extent, greater fiscal revenues for Russia in 2001 and several years beyond can be linked to increased voluntary tax compliance and reporting (see chart above).

The most significant reduction in tax evasion was for taxpayers that experienced the largest decrease in tax rates after the flat rate income tax was introduced. We also find that this decline in tax evasion was likely due to changes in voluntary compliance as opposed to greater enforcement effort by the tax administration authorities.

6 Comments:

At 2/18/2008 11:39 AM, Blogger juandos said...

One question though, who's ox will be gored if we go to a flat tax?

There's been a lot of private business built up around the way the government taxes us today...

 
At 2/18/2008 6:08 PM, Anonymous Lucas Ames said...

I love reading success stories of the flat tax. I have been especially impressed with its success in Estonia as well. I believe there was a south eastern European company running ads in financial publications touting their acceptance of the flat tax - like 10% maybe.

@ juandos - why should we care? If a system is archaic and inefficient there is no reason to pay the massive price of its failures in order to keep afloat the supplemental industries around it.

 
At 2/18/2008 8:15 PM, Anonymous Anonymous said...

It is more than a little ironic to read the words "voluntary compliance" associated with Russian tax administration.

How quickly we forget Yukos or for that matter the way that claimed tax irregularities were used as leverage to force foreign oil companies to give controlling interest to the government in major oil projects.

Tax reform cannot be confused with economic and political freedom. It is mere window dressing.

 
At 2/18/2008 11:15 PM, Anonymous Anonymous said...

The tax income increase in Russia might be because of oil revenues and it's consequences on economy and gov's revenue. (I'm a pro tax-cut policies specially about corporate tax but I think some exaggerate the income effect of it).

 
At 2/19/2008 5:33 AM, Blogger juandos said...

"If a system is archaic and inefficient there is no reason to pay the massive price of its failures in order to keep afloat the supplemental industries around it"...

Well lucas ames, you are preaching to the choir sir...

Totally agree but then again there others who stand to lose money in their 'own' business and I was curious as to who would be hit first and hardest....

anon @ 8:15 p.m. says: "Tax reform cannot be confused with economic and political freedom"...

Cha! Ching! Exactly... Just ask Putin's victims...:-)

 
At 2/19/2008 10:50 AM, Blogger Colin said...

"I love reading success stories of the flat tax. I have been especially impressed with its success in Estonia as well. I believe there was a south eastern European company running ads in financial publications touting their acceptance of the flat tax - like 10% maybe."

Macedonia -- 12%.

 

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