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

Yuriy Gorodnichenko
University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER); Institute for the Study of Labor (IZA)

Jorge Martinez-Vazquez
Georgia State University - Andrew Young School of Policy Studies

Klara Sabirianova Peter
Georgia State University - Andrew Young School of Policy Studies; Institute for the Study of Labor (IZA); Centre for Economic Policy Research (CEPR)


June 2008

Andrew Young School of Policy Studies Research Paper Series No. 08-25

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. We rule out alternative explanations based on changes in tax enforcement effort, savings behavior, expenditures on durables, and others. We also find that 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 gains from the Russian flat tax reform are at least 30% smaller than the gains implied by conventional approaches.

Keywords: Tax Evasion, consumption-income gap, personal income tax, flat tax, difference-in-difference, regression discontinuity, deadweight loss, transition, Russia

JEL Classifications: D73, H24, H36, J3, O1, P2

Working Paper Series

Date posted: February 10, 2008 ; Last revised: October 27, 2009

Suggested Citation

Gorodnichenko, Yuriy, Martinez-Vazquez, Jorge and Sabirianova Peter, Klara, Myth and Reality of Flat Tax Reform: Micro Estimates of Tax Evasion Response and Welfare Effects in Russia (June 2008). Andrew Young School of Policy Studies Research Paper Series No. 08-25. Available at SSRN: http://ssrn.com/abstract=1091533


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Contact Information

Yuriy Gorodnichenko (Contact Author)
University of California, Berkeley - Department of Economics ( email )
549 Evans Hall #3880
Berkeley, CA 94720-3880
United States
HOME PAGE: http://www.econ.berkeley.edu/~ygorodni/index.htm
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Institute for the Study of Labor (IZA)
P.O. Box 7240
D-53072 Bonn Germany
Jorge Martinez-Vazquez
Georgia State University - Andrew Young School of Policy Studies ( email )
University Plaza
PO Box 3992
Atlanta, GA 30302-3992
United States
404-651-3990 (Phone)
404-651-3996 (Fax)
Klara Sabirianova Peter
Georgia State University - Andrew Young School of Policy Studies ( email )
P.O. Box 3992
Atlanta, GA 30302-3992
United States
Institute for the Study of Labor (IZA)
P.O. Box 7240
D-53072 Bonn Germany
Centre for Economic Policy Research (CEPR)
90-98 Goswell Road
London EC1V 7RR United Kingdom
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