The IMF and Flat Tax

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Thee IMF has issued a new report on flat tax. Entitled 'The "Flat Tax(es)": Principles and Evidence' he report has been written by Mick Keen, Kevin Kim and Ricardo Varsano at the IMF.

I'm immensely pleased to see this report come out. There is probably no one better to lead write it than Mick Keen, a former professor at Essex University and a leading thinker in this area. The report says:

Discussion of these quite radical reforms has been marked, however, more by assertion and rhetoric than by analysis and evidence.

It continues:

Several lessons emerge:

- there is no sign of Laffer-type behavioral responses generating revenue increases from the tax cut elements of these reforms;

- their impact on compliance is theoretically ambiguous, but there is evidence for Russia that compliance did improve [although] there is no firm evidence that it was due to parametric tax reform rather than to changes in enforcement occurring around the same time;

- the distributional effects of the flat taxes are not unambiguously regressive, and in some cases they may have increased progressivity, including through the impact on compliance;

- adoption of the flat tax has not resolved common challenges in taxing capital income;

- and it may have strengthened, not weakened, the automatic stabilizers.

It's also important to note that the report found no clear evidence that flat taxes simplified tax systems, which supports my own findings earlier this year. And it concludes:

Looking forward, the question is not so much whether more countries will adopt a flat tax as whether those that have will move away from it.

I think this correct.

I'm also pleased to note a particular comment. On page 16 the authors note that for some people:

If government can somehow be restricted to using only a single marginal tax rate, then this will limit the amount of revenue it can raise; and hence the amount of damage that government can do. While this argument is rarely made explicit, opponents perceive this point keenly: Murphy (2006), for instance, argues on these grounds that the flat tax "…is in effect an attack on the whole structure of the society we live in."

Yes, that Murphy is me. I am pretty confident that the authors share my view.