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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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Author Info
Yuriy Gorodnichenko () (University of California, Berkeley, NBER and IZA)
Jorge Martinez-Vazquez () (Georgia State University)
Klara Sabirianova Peter () (Georgia State University and IZA)

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Abstract

Using micro-level data, 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. Utilizing difference-in-difference and regression-discontinuity-type approaches, we find that large and significant changes in tax evasion following the flat tax reform are associated with changes in voluntary compliance and cannot be explained by changes in tax enforcement policies. We also find the productivity response of taxpayers to the flat tax reform is small relative to the tax evasion response. Finally, we develop a feasible framework to assess the deadweight loss from personal income tax in the presence of tax evasion based on the consumption response to tax changes. We show that because of the strong tax evasion response the efficiency gain from the Russian flat tax reform is at least 30% smaller than the gain implied by conventional approaches.

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Publisher Info
Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 3267.

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Length: 58 pages
Date of creation: Dec 2007
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Handle: RePEc:iza:izadps:dp3267

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Related research
Keywords: tax evasion consumption-income gap personal income tax flat tax difference-indifference regression discontinuity deadweight loss transition Russia

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Find related papers by JEL classification:
D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption
H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
O1 - Economic Development, Technological Change, and Growth - - Economic Development
P2 - Economic Systems - - Socialist Systems and Transition Economies

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

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    Other versions:
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. repec:ese:iserwp: is not listed on IDEAS
  2. Paulus, Alari & Peichl, Andreas, 2007. "Effects of flat tax reforms in Western Europe on equity and efficiency," FiFo-CPE Discussion Papers - Finanzwissenschaftliche Diskussionsbeiträge 08-4, University of Cologne, CPE - Cologne Center for Public Economics. [Downloadable!]
  3. Paulus A, 2008. "Effects of Flat Tax Reforms in Western Europe on Equity and Efficiency," EUROMOD Working Papers em2/08, EUROMOD at the Institute for Social and Economic Research. [Downloadable!]
  4. Klara Sabirianova Peter & Steve Buttrick & Denvil Duncan, 2007. "Global Reform of Personal Income Taxation, 1981-2005: Evidence from 189 Countries," International Studies Program Working Paper Series, at AYSPS, GSU paper0721, International Studies Program, Andrew Young School of Policy Studies, Georgia State University. [Downloadable!]
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