Russia’s flat tax

In 2001, Russia enacted a flat tax rate of 13 per cent; a reform so popular it has since been adopted by countries such as Serbia, Ukraine, Georgia, Romania, Slovakia and Macedonia, says the Healthcare Economist.

But is the flat tax a good thing? According to the authors of a new study published by the National Bureau of Economic Research, it is:

Studying Russia, the authors found that the flat tax lead to a significant decrease in tax evasion.

This is likely due to the fact that lower marginal tax rates decreases the incentive to avoid reporting income.

Further, if there is a decrease in tax evasion, policy makers can lower the marginal tax rate further while still collecting the same amount of revenue.

Lower marginal tax rates should also lead to an increase in the labour supply, however, the authors did not find this to be the case. The flat tax had minimal or no impact on worker productivity. This is likely due to the fact that the supply of labour is very inelastic on both the intensive and extensive margins.

Overall, it seems that the flat tax is not only attractive according to economic theory, but may also work well in reality – at least in terms of reducing tax evasion.

Source: Jason Shafrin, Russia's Flat Tax, Healthcare Economist, January 18, 2008; based upon: Yuriy Gorodnichenko, Jorge Martinez-Vazquez and Klara Sabirianova Peter Myth and Reality of Flat Tax Reform: Micro Estimates of Tax Evasion Response and Welfare Effects in Russia, NBER Working Paper #13719, January 2008.

For text: http://healthcare-economist.com/2008/01/18/russias-flat-tax/

For report: http://www.nber.org/papers/w13719

For more on Taxes: http://www.ncpa.org/sub/dpd/index.php?Article_Category=20

FMF Policy Bulletin/ 26 February 2008