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  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 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