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Myth and Reality of Flat Tax Reform: Tax Evasion and Real Side Response of Russian Households

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Abstract

We use detailed micro-level data on consumption and income for a 1998-2004 panel of Russian households to study the effects of the flat income tax reform in 2001. We show that the gap between household expenditures and reported income is a meaningful measure of tax evasion. We use the difference-indifference and regression discontinuity approaches to assess the response of tax evasion and worker productivity to the flat tax. We find that the tax evasion response (10-12%) is larger than the productivity response (0-4%), and thus increased tax revenues and reported earnings are largely driven by improved tax compliance.

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  • Yuriy Gorodnichenko & Jorge Martinez-Vazquez & Klara Sabirianova Peter, 2007. "Myth and Reality of Flat Tax Reform: Tax Evasion and Real Side Response of Russian Households," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper0728, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
  • Handle: RePEc:ays:ispwps:paper0728
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