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. 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

Direct Estimation of Hidden Earnings: Evidence from Russian Administrative Data

“…Instead, car values grew by only 37 percent in the private sector and by 24.3 percent in the stateowned sector. These values suggest that increased transparency might indeed be responsible for a large share of growth in statistically measured GDP (compare Gorodnichenko, Martinez-Vazquez, and Peter 2009). And the increase in transparency seems to have been more pronounced in the state-owned than in the private sector.…”

“…Previous empirical approaches exploit macroeconomic relationships, such as the share of cash in the money supply (Cagan 1958;Tanzi 1983), electricity consumption (Kaufmann and Kaliberda 1996;Schneider and Enste 2000;Alexeev and Pyle 2003), or multiple indicators aimed at econometrically estimating the hidden activity as an unobserved variable (Frey and Weck-Hanneman 1984;Giles 1999). Other studies use survey data on household incomes and consumption expenditures (Pissarides and Weber 1989;Lyssiotou, Pashardes, and Stengos 2004;Ivanova, Keen, and Klemm 2005;Gorodnichenko, Martinez-Vazquez, and Peter 2009). Yet other studies employ direct evidence from tax audits (Klepper and Nagin 1989;Feinstein 1999).…”

Is a flat tax reform feasible in a grown-up democracy of Western Europe? A simulation study for Germany

“…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 Gaddy andGale 2005 andGorodnichenko et al 2007). Moreover, the case of Russia differs from Germany insofar as the latter has a long tradition of income taxation in a market economy and a well-established tax administration to ensure tax compliance.…”

Do Transfer Taxes Reduce Intergenerational Transfers?

“…Gorodnichenko, Martinez‐Vazquez, and Peter () report evidence from Russian survey data suggesting that people under‐report income to survey takers for fear of tipping off the tax authorities.…”