What Have We Learned from Russia?

Not about Trump or American elections, but with respect to public finance.

From the perspective of public finance scholarship, much of what I know about Russia comes from numerous studies over the years of their 2001 flat tax reform. The reform replaced a progressively structured system of 12, 20, and 30% with a single rate of 13%. Subsequently, Russia saw a real increase in PIT revenues both in terms of levels (about 20%) and relative to GDP (about 26%). The size of the reform and the greater revenues immediately thereafter were sure to bring it a great deal of attention from both academics and policy makers alike.

Of course, there was much at ideological stake to see a large country cut taxes and see increased revenues. Gaddy and Gales (Brookings) produced a report “demythologizing” the reform for its apparent “supply side” effects, and indeed those magnitudes are implausibly large to be attributable to the tax reform overall. Overall, however, a large country with a history of poor data is unlikely to be a source of high quality evidence on the big questions policy makers want to know. Instead, attention quickly turned to issues in compliance and tax evasion. In a 2005 IMF working paper, Ivanova, Keen, and Klemm took a broad investigation using both micro and macro data. Their conclusion was that there was no strong supply side effect of the reform, but that compliance did improve rather substantially. As you’ll see in a sampling of subsequent research on the reform (see below), I would say the Ivanova et al. findings have largely stood the test of time. To scholars of 2018 familiar with taxable income elasticities, that probably seems like a safe bet conclusion, but at the time most labor supply elasticities were still relatively large (around unity) and we were just on the edge of the improved data and technique literature that would ultimately bring those estimates way down.

  • Gorodnichenko, Martinez-Vazquez, and Peter (2009). “Myth and Reality of Flat Tax Reform. Micro Estimates of Tax Evasion Response and Welfare Effects in Russia.” Journal of Political Economy. These authors compare surveys of household expenditure data and reported earnings to develop a measure of tax evasion. This allows them to derive a lower than conventional estimate of deadweight loss that considers tax evasion (i.e. households aren’t sacrificing as much consumption because they can hide their income from taxable authorities).
  • Duncan and Peter (2010). “Does Labour Supply Respond to A Flat Tax? Evidence from the Russian Tax Reform.” Economics of Transition. Using micro data, they find real labor supply intensive margin work increases (i.e. hours of work) among men and at the distributional tails for women, as well as increased extensive margin responses (i.e. probability of reporting a job) for both genders. The authors note that these increases are not large enough to produce the aggregate increases in PIT revenues that followed the reform.
  • Duncan (2014). “Behavioral Responses and the Distributional Effects of the Russian ‘Flat’ Tax.” Journal of Policy Modeling. The key insight of the model, fit to Russian data for the 2001 tax reform, is that income inequality from income tax data overstates actual income inequality because of tax reform. That is, the inequity of the Russian switch to the flat tax was overstated because high income taxpayers were evading higher rates under the progressive system, and therefore pay more in taxes on the flatter.

 

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s