Chernikova Maria

A flat-rate tax: pros & cons

Structure

What is flat tax?

Advantages and disadvantages of flat-rate tax system

Flat tax reform in Russia

Sources

«The Russian Flat Tax Reform», A. Ivanova, M. Keen, A. Klemm, 2005

«The Experience Of Russia IN Reforming Tax Sistem: Achievements, Problems And Perspectives», A.Krivka, 2006

«The Global Flat Tax Revolution», Daniel J. Mitchell, 2007

What is flat tax?

A flat tax (short for flat rate tax) is a tax

system with a constant tax rate

Flat tax system was proposed in the early 1990’s by Dick Armey

Expectations

To tax income at one low rate

To eliminate double taxation of saving and investment

To wipe out the special preferences, that caused complexity, distortions, and corruption.

Global tax reform revolution Estonia was the first to adopt a flat tax, implementing a

26% rate in 1994 Latvia – 25% rate, Lithuania – 33% Russia stunned the world by adopting a 13% flat tax,

which went into effect in 2001. The flat tax then spread to Serbia(14%), Slovakia(19%)

and other countries

Advantages of flat tax reform Faster Economic Growth Instant Wealth Creation Simplicity Fairness An End to Micromanaging and Political Favoritism Increased Civil Liberties Global Competitiveness

Disadvantages of flat tax reform

More burden on middle class The abolition of the investment preference A great government intervention in business The lack of coordination with tax administration

The necessity of the reform in Russia

Extreme instability Complexity Uneven distribution of tax burden Weak administration Low competitiveness Poor transparency

=> Background for the shadow economy

Flat tax reform in Russia

The tax rates were lowered from progressive 12-35% to proportional 13%

Comparing 2001 and 2000 income tax inflows increased from 174,8 to 255,8 billion Rb (46,3% increase)

Flat tax reform in Russia (continuation)

Average tempo of annual income tax revenues increase in 2000-2004 was almost 35%

The weight of income tax in consolidated budget structure increased from 8,33% in 2000 to 10,59% in 2004

Conclusion The flat-rate system increases budget

revenues

In Russia the results of the flat tax reform excelled the most optimistic expectations

Strong revenue performance attracted attention, both in the countries of the former Soviet Union and, more recently, elsewhere