November 28, 2006

Russia's Flat Tax and Economic Growth: A Little Myth-Busting

In the wake of President Bush's recent love-in with Estonia's flat-rate income tax, you'll likely hear anti-taxers once again floating the canard that Russia's move to a flat-rate income tax helped save their economy.

Of course, some would argue that Russia's economy still needs plenty of saving. But for anyone who sees a supply-side miracle in Russia's recent tax changes, check out this excellent report from Brookings economists Clifford Gaddy and Bill Gale. Gaddy and Gale find that:
The increase in compliance that followed the 2001 reform is more likely attributable to changes in the administration and enforcement of tax laws than to lower rates.
In particular, income tax revenues shot up after Russia enacted its flat tax not because the tax rates were flattened, but because at the same time, they started regular withholding of income taxes at the source. Withholding is a thing we take for granted as part of the normal functioning of our income tax-- but it's easy to imagine how much of a boost regular withholding would have on a country's income tax.

Kudos to Gaddy and Gale for cutting through the rhetoric on this point.


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