The study calls flat taxes "not quite a revolution, but certainly something of a craze". It stresses that existing flat-tax schemes in eight eastern European countries "differ fundamentally" and that "empirical evidence on their effects is very limited". It goes on to say that there is no simple rule to the extent that the introduction of a flat-tax scheme would create rises in revenue or lead to higher compliance with tax law.
|
|
|
Personal Income Tax Rates |
|
|
|
|
|
Flat Tax Adopted |
After |
Before |
Corporate Income Tax Rate, After Reform |
Change in Basic Allowance |
|
Estonia |
1994 |
26% |
16-33% |
26% |
Modest increase |
|
Lithuania |
1994 |
33% |
18-33% |
29% |
Substantial increase |
|
Latvia |
1997 |
25% |
25 and 10% |
25% |
Slight reduction |
|
Russia |
2001 |
13% |
12-30% |
37% |
Modest increase |
|
Ukraine |
2004 |
13% |
10-40% |
25% |
Increase |
|
Slovak Republic |
2004 |
19% |
10-38% |
19% |
Substantial increase |
|
Georgia |
2005 |
12% |
12-20% |
20% |
Eliminated |
|
Romania |
2005 |
16% |
18-40% |
16% |
Increase |
Source: IMF staff. Rates relate to year before and after adoption of the flat tax.
The study also says that in some cases flat-tax schemes may effectively have increased progressivity, contrary to what they set out to do. The authors say: "What remains unclear is the sustainability of the flat tax. Structurally, the flat taxes that have been adopted do not provide a coherent framework for dealing with the difficulties that almost all countries now perceive in taxing internationally mobile capital income."
The main economic drawback of flat-tax schemes that introduced single rates close to the lowest of the pre-reform marginal tax rates, the authors say, is that they have detrimental effects on smaller enterprises. "Political economy considerations point towards the adoption of rate schedules that tend to benefit middle income earners: exactly the group that tends to lose most from the adoption of a second wave flat tax."
The study deplores the hype around flat taxes. "A notable and troubling feature of discussion of the flat tax is that it has been marked more by rhetoric and assertion than by analysis and evidence." They are of the opinion that this hype could spell the schemes' doom: "The very spread of the flat tax in itself undermines its value as a signal: it may prove too easy to mimic."
The authors conclude: "While there will no doubt be new members of the flat-tax community, in some respects the more interesting question is whether there will be any defections."
