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

64 Pages Posted: 10 Feb 2008  

Yuriy Gorodnichenko

University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER); IZA Institute of Labor Economics

Jorge Martinez-Vazquez

Georgia State University - Andrew Young School of Policy Studies

Klara Sabirianova Peter

University of North Carolina - Chapel Hill; IZA Institute of Labor Economics; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 3 versions of this paper

Date Written: June 2008

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 Classification: D73, H24, H36, J3, O1, P2

Suggested Citation

Gorodnichenko, Yuriy and 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: https://ssrn.com/abstract=1091533 or http://dx.doi.org/10.2139/ssrn.1091533

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

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
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

University of North Carolina - Chapel Hill ( email )

Chapel Hill, NC 27599
United States

HOME PAGE: http://www.unc.edu/~kpeter

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

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