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Why Post-Communist Countries Choose the Flat Tax: A Comparative Welfare Approach

Author

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  • Gancho Ganchev

    (Department of Finance and Accounting, South-West University “Neofit Rilski”, Blagoevgrad, Bulgaria)

  • Stojan Tanchev

    (Department of Finance and Accounting, South-West University “Neofit Rilski”, Blagoevgrad, Bulgaria)

Abstract

Our aim is to explain why the post-communist countries were inclined to implement proportional income taxation schemes, given the broad variety of personal tax regimes and rates applied in the rest of the world. To resolve this problem a new type of social welfare function, allowing for variable (including negative) marginal utility of income, is introduced. This new approach improves our ability to comprehend the communist and post-communist social policy attitudes from a comparative standpoint. To verify our assertions, a probit regression model is applied. The empirical investigation is based on panel data including 42 countries from Europe and Central Asia for the period of 2000–2015. The primary inference is that the decisions to implement flat tax can be explained by the law of diminishing marginal utility of income and some additional policy-related factors. As it concerns the future, a successful catching-up strategy by the post-communist countries creates conditions for gradual abandonment of the flat tax practices.

Suggested Citation

  • Gancho Ganchev & Stojan Tanchev, 2019. "Why Post-Communist Countries Choose the Flat Tax: A Comparative Welfare Approach," Acta Oeconomica, Akadémiai Kiadó, Hungary, vol. 69(1), pages 41-62, March.
  • Handle: RePEc:aka:aoecon:v:69:y:2019:i:1:p:41-62
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    More about this item

    Keywords

    post-communist economies; proportional taxation; social welfare function; diminishing marginal utility of income;
    All these keywords.

    JEL classification:

    • 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

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