Myth and Reality of Flat Tax Reform:Micro Estimates of Tax Evasion Responseand Welfare Effects in Russia

Using micro-level data, we examine the effects of Russia`s 2001 flat rate income tax reformon consumption, income, and tax evasion. We use the gap between household expendituresand reported earnings as a proxy for tax evasion with data from a household panel for 1998-2004. Utilizing difference-in-difference and regression-discontinuity-type approaches, we findthat large and significant changes in tax evasion following the flat tax reform are associatedwith changes in voluntary compliance and cannot be explained by changes in taxenforcement policies...