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Myth and Reality of Flat Tax Reform: Micro Estimates of Tax Evasion Response and Welfare Effects in Russia

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  • Yuriy Gorodnichenko
  • Jorge Martinez-Vazquez
  • Klara Sabirianova Peter

Abstract

We examine the effects of Russia's 2001 flat rate income tax reform on consumption, income, and tax evasion. We use the gap between household expenditures and reported earnings as a proxy for tax evasion with data from a household panel for 1998-2004. We associate large and significant changes in tax evasion following the flat tax reform with changes in voluntary compliance. We develop a consumption-based framework to assess the deadweight loss from income tax in the presence of tax evasion and show that the efficiency gains from the reform are at least 30 percent smaller than the gains implied by conventional approaches. (c) 2009 by The University of Chicago. All rights reserved.

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  • Yuriy Gorodnichenko & Jorge Martinez-Vazquez & Klara Sabirianova Peter, 2009. "Myth and Reality of Flat Tax Reform: Micro Estimates of Tax Evasion Response and Welfare Effects in Russia," Journal of Political Economy, University of Chicago Press, vol. 117(3), pages 504-554, June.
    • Handle: RePEc:ucp:jpolec:v:117:y:2009:i:3:p:504-554
    DOI: 10.1086/599760
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    More about this item

    JEL classification:

    • D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development
    • P2 - Political Economy and Comparative Economic Systems - - Socialist and Transition Economies

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    1. Myth and Reality of Flat Tax Reform: Micro Estimates of Tax Evasion Response and Welfare Effects in Russia (JPE 2009) in ReplicationWiki
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