One step forward and three steps back: pros and cons of a flat tax reform

Di Caro, Paolo and Figari, Francesco and Fiorio, Carlo and Manzo, Marco and Riganti, Andrea (2022): One step forward and three steps back: pros and cons of a flat tax reform.

Abstract

We use a rich administrative dataset on individual tax returns from 2008 to 2015 to analyse the behavioural and distributive effects of a flat tax (FT) reform introduced in 2011 for residential property income in Italy replacing the progressive personal income tax. Linking a panel of individual tax data with cadastral property records, and using a difference-in-difference identification strategy, we address five research questions: (i) does the FT increase the probability of declaring a positive rental income to the tax authorities? (ii) does the FT increase the declared tax base? (iii) is the reduced tax burden shared with the tenant? (iv) does the FT affect the overall tax revenue? (v) who are the gainers of the policy? The estimated intention-to-treat effects suggest that the decrease of tax evasion is limited whereas tax burden reduction is large, it is not shared with tenants and it mostly benefits top-income taxpayers. Overall, top 1% of property owners reap about 20% of the overall lost tax revenues.

• Item Type: MPRA Paper
• Language: English
• Keywords: Flat tax reform; administrative data; tax evasion; income distribution
• Subjects: D - Microeconomics > D1 - Household Behavior and Family Economics > D12 - Consumer Economics: Empirical Analysis; H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H24 - Personal Income and Other Nonbusiness Taxes and Subsidies; H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H25 - Business Taxes and Subsidies

References

Alvaredo, F., T. Piketty, E. Saez, L. Chancel, and G. Zucman (2018). World Inequality Report 2018. Post-Print halshs-01885458, HAL.

Atkinson, A. B. and A. Brandolini (2001). Promise and pitfalls in the use of" secondary" data-sets: Income inequality in oecd countries as a case study. Journal of economic literature 39 (3), 771–799.

Auten, G. and D. Splinter (2019). Top 1 percent income shares: Comparing estimates using tax data. In AEA Papers and Proceedings, Volume 109, pp. 307–11.

Bach, L., A. Bozio, B. Fabre, and A. G. C. L. C. Malgouyres (2021). Follow the money! why dividends overreact to flat-tax reforms. pp. 1–50.

Barrios, S., V. Ivaškait ̇e-Tamoši ̄un ̇e, A. Maftei, E. Narazani, and J. Varga (2020). Progressive tax reforms in flat tax countries. Eastern European Economics 58 (2), 83–107.

Boadway, R. (2004, October). The Dual Income Tax System - An Overview. ifo DICE Report 2 (03), 03–08.

Di Caro, P. (2020). Decomposing personal income tax redistribution with application to Italy. The Journal of Economic Inequality 18 (1), 113–129.

Diamond, P. and E. Saez (2011, December). The case for a progressive tax: From basic research to policy recommendations. Journal of Economic Perspectives 25 (4), 165–90.

Gorodnichenko, Y., J. Martinez-Vazquez, and K. Sabirianova Peter (2009). Myth and reality of flat tax reform: Micro estimates of tax evasion response and welfare effects in russia. Journal of Political economy 117 (3), 504–554.

Hall, R. E. and A. Rabushka (1985). The route to a progressive flat tax. Cato Journal 5, 465–480.

Ivanova, A., M. Keen, A. Klemm, P. Pestieau, and A. Velasco (2005). The russian ’flat tax’ reform. Economic Policy 20 (43), 399–444.

Keen, M., Y. Kim, and R. Varsano (2008). The “flat tax (es)”: principles and experience. International Tax and Public Finance 15 (6), 712–751.

Larrimore, J., R. V. Burkhauser, G. Auten, and P. Armour (2021). Recent trends in us income distributions in tax record data using more comprehensive measures of income including real accrued capital gains. Journal of Political Economy 129 (5)

Poterba, J. (2004). Taxation and corporate payout policy. The American Economic Review 94 (2), 171–175.

Ravallion, M. (2021). Missing top income recipients. Technical report, National Bureau of Economic Research.

Saez, E. and G. Zucman (2019). The Triumph of Injustice: How the Rich Dodge Taxes and How to Make Them Pay. Norton Company.