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

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in Myth and Reality of Flat Tax Reform: Micro Estimates of Tax Evasion Response and Welfare Effects in RussiaYuriy Gorodnichenko Jorge Martinez-Vazquez Klara Sabirianova Peter The Institute for the Study of Labor (IZA) in Bonn is a local and virtual international research center and a place of communication between science, politics and business. IZA is an independent nonprofit company supported by Deutsche Post World Net. The center is associated with the University of Bonn and offers a stimulating research environment through its research networks, research support, and visitors and doctoral programs. IZA engages in (i) original and internationally competitive research in all fields of labor economics, (ii) development of policy concepts, and (iii) dissemination of research results and concepts to the interested public. D I S C U S S I O N P A P E R S E R I E SIZA Discussion Papers often represent preliminary work and are circulated to encourage discussion. Citation of such a paper should account for its provisional character. A revised version may be available directly from the author. ABSTRACT Myth and Reality of Flat Tax Reform: Micro Estimates of Tax Evasion Response and Welfare Effects in Russia *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][1999][2000][2001][2002][2003][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.JEL Classification: D73, H24, H36, J3, O1, P2

Tax compliance under tax regime changes

“…This finding is in line with the results from recent empirical assessments of the Russian flat tax reform by Ivanova, Keen and Klemm (2005) as well as Gorodnichenko, Martinez-Vasquez and Peter (2009). What our experiment proves is that the effect is robust even when controlling for other determinants of compliance such as risk aversion, gender, or the marginal tax rate.…”

“…Indeed, on the basis of household panel data, Ivanova, Keen and Klemm (2005) find that the Russian flat tax reform from 2001 has been associated with a higher degree of compliance. A similar result regarding the Russian reform is reported by Gorodnichenko, Martinez-Vasquez and Peter (2009)…”

The Benefits and Problems of Linking Micro and Macro Models — Evidence from a Flat Tax Analysis

“…Indeed, tax compliance and revenue apparently improved by about one third after the 2001 tax reform (Ivanova et al (2005)). However, it is not clear whether this can be attributed solely to the flat tax or to improved law enforcement and tax administration which was also part of the 2001 reform (see also Gorodnichenko et al (2007)). …”

Competition and Cooperation in Economics and Business

“…ln w is the log of last month's wages, X is a vector of covariates comprising of a gender indicator, a region indicator (rural vs. urban), highest level of education attained (high school or equivalent, tertiary vocational school, bachelor's degree, or master's and above), experience (defined as age minus years of schooling minus six), squared experience, tenure, squared tenure, a series of indicators denoting provincial location, and ε δ is an error term with a mean of zero. Model (1) above is essentially an extension of a standard Mincer earnings function taken from Gorodnichenko and Peter (2007). The parameter of primary interest here is δ 3 which will show us whether or not there are wage differentials between the two employment sectors at the individual level.…”

“…As it may be impossible to truly demonstrate the existence of corruption through econometric analysis, we will follow the method previously used by Pissarides and Weber (1989), Gorodnichenko and Peter (2007), Gorodnichenko et al (2009), andHurst et al (2014), to explore whether public-sector employees show indications of having 'unreported income'. This research is based on the logic that if someone has received an income above what they report to data collectors, they will then use that 'extra' income for consumption, wherever that extra income may have come from.…”