The "Flat Tax(es)": Principles and Evidence

Abstract

One of the most striking tax developments in recent years, and onethat continues to attract considerable attention, is the adoptionby several countries of a form of "flat tax." Discussion of thesequite radical reforms has been marked, however, more by assertionand rhetoric than by analysis and evidence. This paper reviews experiencewith the flat tax, seeking to redress the balance. It stresses thatthe flat taxes that have been adopted differ fundamentally, and thatempirical evidence on their effects is very limited. This precludessimple generalization, but several lessons emerge: there is no signof Laffer-type behavioral responses generating revenue increasesfrom the tax cut elements of these reforms; their impact on complianceis theoretically ambiguous, but there is evidence for Russia thatcompliance did improve; the distributional effects of the flat taxesare not unambiguously regressive, and in some cases they may haveincreased progressivity, including through the impact on compliance;adoption of the flat tax has not resolved common challenges in taxingcapital income; and it may have strengthened, not weakened, the automaticstabilizers. Looking forward, the question is not so much whethermore countries will adopt a flat tax as whether those that have willmove away from it.