The IMF has published a breakthrough report on great results following a controversial move by Russian tax authorities. About 5 years ago, Russia cut through its tangled web of income tax brackets and simplified legislation to tax everyone (essentially) equally at 13%. Considering the former range of brackets extended from 12% to 30%, this was a very low choice and led to speculations that the Russian government's income would be a lot less than in former years. Turns out that Russia actually raised collections by 26%. What great news: people were taxed at lower rates, but somehow the government ended up with more cash in their pockets. With such a pot of gold in sight, neighboring central Asian and Eastern European countries are now scrambling to implement similar measures.

Although the media has latched on to the good results, it would do these countries some good to read the full IMF report before they start ripping pages out of their tax code books.

The IMF report basically says the great improvement is very hard to attribute to the tax reform itself. A whole lot happened in Russia over this time period. In fact, the report states that there "is no strong evidence that the tax reform itself caused [Russia's tax] revenue boom".

However, there does seem to be evidence pointing to big decrease in tax evasion. There was an increase of around 16 percentage points in the proportion of their income declared by those affected by the reform. Again, the results are not crystal clear. They may have been affected by improvements in Russian enforcement, for example.

"[W]hatever the reason for the PIT revenue boom, it lies in something
other than behavioral responses to the PIT reform itself—serves an important cautionary note for would-be emulators."

Posted by Michelle Smith on January 11, 2006 09:23 PM