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

Yuriy Gorodnichenko, Jorge Martinez-Vazquez () and Klara Sabirianova Peter ()

No 3267, IZA Discussion Papers from Institute of Labor Economics (IZA)

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.

Keywords: Russia; deadweight loss; tax evasion; consumption-income gap; flat tax; personal income tax; difference-indifference; transition; regression discontinuity (search for similar items in EconPapers)
JEL-codes: D73 H24 J3 O1 P2 (search for similar items in EconPapers)
Pages: 58 pages
Date: 2007-12
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (20)

Published - published in: Journal of Political Economy, 2009, 117(3), 504-554

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Related works:
Journal Article: Myth and Reality of Flat Tax Reform: Micro Estimates of Tax Evasion Response and Welfare Effects in Russia (2009)
Working Paper: Myth and Reality of Flat Tax Reform: Micro Estimates of Tax Evasion Response and Welfare Effects in Russia (2008)
Working Paper: Myth and Reality of Flat Tax Reform: Micro Estimates of Tax Evasion Response and Welfare Effects in Russia (2007)
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