Via Mark Thoma, an IMF working paper studying flat taxes worldwide has just come out, and it's results aren't terribly encouraging for supply-siders:
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; 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. 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.
The Laffer Curve, folks will remember, is the idea that lowering tax rates increases economic growth and thus results in more tax revenue. In other words, tax cuts increase tax revenue. It never made much sense (save in regimes with truly exorbitant tax burdens), but conservatives predicated their support for tax cuts and a flat tax on the theory anyway. Now it's clear the theory is shite. On the bright side, another claim of flat taxers does look promising -- that if you make the tax easier to comply with, compliance will go up, and there will be more revenue because of decreased evasion.
The sterling reputation of flat taxes has largely come because money of the countries who adopted them saw rapid growth and success in the succeeding period. The authors of the study, however, don't think the flat tax deserves the credit:
The flat tax has commonly—almost universally—been adopted by new governments anxious to signal a fundamental regime shift, towards more market-oriented policies. In several cases, the signal appears to have been well-received. Where no such reputation needs to be acquired, the appeal of the flat tax is consequently less.
So the adoption of the flat tax has been a big signpost by new regimes claiming themselves free of old, anti-business nostrums and open for new investment.
