Russia's Flat Tax

by folkbum

Libertarian Nick Schweitzer read my rebuttal of Tom McMahon's rebuttal of liberal bloggers' rebuttal of Charlie Sykes, and he comes away displeased.

It is in particular the line "tax cuts don't increase revenue" that displeases Nick's libertarian self. He writes (his iatlics),

One of the cooler phenomena that has happened in the former Soviet states since the 1990's is their incredible economic growth compared to that of the Western European states that are slowly turning socialist with their large government social programs.  One of the keys behind this incredible growth has been that many of these former Soviet states in Eastern Europe have adopted the flat tax.

Nick then links to the Libertarian Cato Institute, where someone notes that since instituting a 13% flat tax in 2001, Russia's tax collections have increased dramatically.

Problem is, this is not a function of the tax itself, but rather greater compliance (my italics):

One senior government tax official estimates that before the flat tax took effect at the beginning of 2001, Russians on average declared as little as 25% of their income. Since it was introduced, there has been a marked increase in both payment rates and revenue. Official statistics show that income tax revenue rose 28% between 2000 and 2001, and a further 21% by last year, after adjustment for inflation. Total government revenue from personal income taxes shot up from an unadjusted $6.2 billion in 2000 to almost $12 billion last year.

The Kremlin is pleased. "We don't think it's possible to force people to pay taxes through repressive sanctions," says Mikhail Orlov, head of tax policy at the Ministry of Economy. "The tax system may be primitive, but it's simple." And, he added, so far it works.

Part of the credit for the turnaround goes to a clever advertising campaign designed to convince taxpayers that the tax is a bargain. One TV ad during the recent tax season showed two apples, one with a 13% slice cut out of it representing the flat tax and the other missing a 30% chunk, a reference to Russia's former top income tax. The message: Taxes are so low that any reasonable person would pay up. "It's a small amount, so of course it's worth paying," says Natasha Diniliouk, an accountant who lives in Moscow.

In other words, more people paid taxes instead of skipping out on them, and that as much as anything what caused revenues to increase. Taxing 30% of only 25% of the country's income certainly leads to a lower total than taxing 13% of 100% of income. This is something Nick's Cato link leaves out of the discussion.

In the US, since we have near-100% compliance, switching to a flat tax would certainly make it easier to file, but I doubt it would create much new revenue--and it abandons the only progressive form of taxation that we have.