Flat tax: A review of the Russian experience

Mark Perry points me to an interesting paper. Perry’s graph, the one below, is not in the original paper, but I think perhaps it should have been ( ) – it is a graphical representation of a subset of the information contained in table #1 from the appendix:

From the conclusion:

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.

According to the authors the by far greatest effect of the flat tax is that of increased compliance, the contribution from ie. effects on the labor supply are much smaller. Naturally, both the compliance- and labour supply effects are higher for high income groups, that is the groups where the resulting tax savings from the -reform are high.

The standard economic argument in favour of lower taxes is that taxes are distortionary (remember that it is important which questions you ask here) and that lower taxes means increased efficiency. It’s worth noting that what this paper implies is that even if taxes are not all that distortionary – it’s still a good idea to lover the taxes.

If Kristian Jensen really wanted to lower the amount of undeclared work taking place in Denmark, he should seriously considering a tax reform. I know we just had one, but it didn’t solve any of the major problems – how could it anyway, it was never meant to do that (what the reform was meant to do, in case you were in doubt, was to secure Fogh four more years in office). Even if the effects on the labour supply from a -reform would turn out to be quite low, there might still, judging from this study, be significant compliance effects that would lower the costs of the reform (if it did not turn out to finance itself altogether; under the current tax regime some reforms, flat tax or not, undoubtedly would if they were to lower the top marginal rates).