The 'Flat Tax(Es)': Principles and Evidence

50 Pages Posted: 31 Oct 2006

See all articles by Michael Keen

Michael Keen

International Monetary Fund (IMF) - Fiscal Affairs Department; CESifo (Center for Economic Studies and Ifo Institute); Institute for Fiscal Studies (IFS)

Yitae Kim

Ministry of Finance and Economy, Korea

Ricardo Varsano

International Monetary Fund (IMF)

Date Written: September 2006

Abstract

One of the most striking tax developments in recent years, and one that continues to attract considerable attention, is the adoption by several countries of a form of 'flat tax'. Discussion of these quite radical reforms has been marked, however, more by assertion and rhetoric than by analysis and evidence. This paper reviews experience with the flat tax, seeking to redress the balance. It stresses that the flat taxes that have been adopted differ fundamentally, and that empirical evidence on their effects is very limited. This precludes simple generalization, but several lessons emerge: there is no sign of Laffer-type behavioral responses generating revenue increases from the tax cut elements of these reforms; their impact on compliance is theoretically ambiguous, but there is evidence for Russia that compliance did improve; the distributional effects of the flat taxes are not unambiguously regressive, and in some cases they may have increased progressivity, including through the impact on compliance; adoption of the flat tax has not resolved common challenges in taxing capital income; and it may have strengthened, not weakened, the automatic stabilizers. Looking forward, the question is not so much whether more countries will adopt a flat tax as whether those that have will move away from it.

Keywords: Flat tax, tax reform, income tax

JEL Classification: H20, H30

Suggested Citation

Keen, Michael and Kim, Yitae and Varsano, Ricardo, The 'Flat Tax(Es)': Principles and Evidence (September 2006). IMF Working Paper, Vol. , pp. 1-50, 2006. Available at SSRN: https://ssrn.com/abstract=941280

Michael Keen (Contact Author)

International Monetary Fund (IMF) - Fiscal Affairs Department ( email )

700 19th Street, NW
Washington, DC 20431
United States

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Institute for Fiscal Studies (IFS)

7 Ridgmount Street
London, WC1E 7AE
United Kingdom

Yitae Kim

Ministry of Finance and Economy, Korea ( email )

Government Complex II
Gwacheon, 427-7
Korea, Republic of (South Korea)

Ricardo Varsano

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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