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Flat Taxes Are Big in the Former USSR. Have They Worked?
Posted on Nov 12, 2011
By Braden Goyette
More than just tax reform
While the 2005 IMF study found that overall tax compliance had improved in Russia — more people were reporting their incomes and paying taxes appropriately — the study also found that this didn’t account for the entire increase in revenue. “The general view among those who have looked closely at the data was that what happened to revenue was a reflection of broader developments to the Russian economy at the time,” Keen said.
An overall increase in wages contributed greatly to increased tax revenue. “Our analysis suggests that the strength of [personal income tax] revenues in Russia over this period was largely driven by an increase in real wage rates unrelated to the reform,” the IMF study said [PDF; see p. 40].
Though proponents of a flat income tax speculate that a lower consistent tax rate would motivate people to work harder, the 2005 IMF study also found that that wasn’t the case in Russia. “Based on what we found and what others have found since, there has been very little effect on actual work effort,” Keen said.
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Cain and Perry’s tax proposals aren’t quite like the ones enacted in Eastern Europe. Former Tax Policy Center Director Len Burman has a helpful FAQ that clarifies this issue:
Both Gingrich and Perry are proposing an optional flat income tax — Gingrich’s at 15 percent, Perry’s at 20 — that would allow you to choose between paying the flat rate or paying according to the current system. Creating a two-tiered tax system, Åslund pointed out, wouldn’t exactly simplify the tax code. Perry’s proposed income tax also isn’t totally flat, because it wouldn’t touch some types of income — for instance, investment income.
Cain’s tax plan is flatter — he’s proposing a 9 percent personal tax, a 9 percent business tax and a 9 percent federal sales tax to make up for the decreased revenue. Under current tax law, sales taxes are already levied by the states [PDF], with local taxes coming on top of that. Cain’s plan also would eliminate the Social Security and Medicare payroll taxes. (Cain has expressed interest in privatizing Social Security, and endorsed Paul Ryan’s plan to privatize Medicare.)
It’s also worth noting that sending in tax returns on postcards, as Gingrich and Perry have pledged to make possible, could cause a new set of problems. “In tax affairs, what you want is precision in terms of defining what’s income or what the tax base is and so forth. You can’t do it on a postcard,” Hufbauer said. Leaving out the details, he cautioned, would leave room for poor administration or tax evasion.
What a flat tax would do in the U.S.
Experts say we probably wouldn’t see any immediate spike in personal income-tax revenue if the U.S. were to adopt a flat income tax. Instead, they say, the candidates’ plans probably would lead to plummeting revenue for the first several years.
“Any growth effects, even in the best of circumstances, that’s a five-year proposition,” Hufbauer said. “And how much growth is a matter of debate.”
Analyses from the nonpartisan Tax Policy Center project that Cain and Perry’s plans would both lead to decreased revenue; the center hasn’t yet scrutinized Gingrich’s plan. Of the other two, Perry’s plan would have a greater impact on government coffers, cutting projected revenue by about 27 percent by 2015.
The Tax Policy Center also concluded that Perry and Cain’s plans would mean an increased tax burden on middle- and low-income families. Cain has since modified his plan so those below the poverty line would be exempt from the individual tax. A Tax Policy Center researcher told The Washington Post that poor families would still see a tax increase under the plan, albeit a smaller one.
The Gingrich and Perry plans also include some exemptions and deductions that would make them less regressive. Gingrich’s plan would allot everyone a $12,000 personal deduction, and count charitable donations and homeownership as tax-deductible; Perry’s includes a $12,500 personal deduction, and deductions for “charitable contributions, mortgage interest, state and local taxes, and Social Security benefits.”
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