NCPA - National Center for Policy Analysis


May 26, 2004

Since Russia adopted a flat tax three years ago, the nation's real tax revenue has nearly doubled and the gospel of its success has spread across Eastern Europe. Even China has taken steps to consider the flat tax as a policy alternative.

On January 1, 2001, a 13 percent flat-rate tax on personal income took effect in Russia, replacing a 3-bracket system that imposed a top rate of 30 percent on taxable income exceeding $5,000. According to a new report by the Hoover Institution, the flat tax has been an unqualified success:

  • After 3 years under the flat tax, real tax revenues in Russia have risen by 80 percent.
  • Since economic growth reached a record-high of 10 percent in 2000, growth has slowed to about half that level, suggesting the rise in revenue cannot be attributed solely (or even largely) to growth.
  • Of all the personal income taxes collected, 97 percent came from taxes on income, 2 percent from taxes on dividends (at a higher rate of 30 percent), and 1 percent from taxes on non-residents and entrepreneurs.

In addition to the higher rate paid on dividends, Russians who reside in Russia less than 183 days during the tax year are taxed at a rate of 30 percent on their taxable income. Other sources of income (e.g., lotteries) are taxed at 35 percent.

The higher rates on dividends and other sources of income reflect a Russian distinction between so-called "unearned income" and "earned income," even though capital gains on homes and securities are exempt.

Source: Alvin Rabushka, "The Flat Tax at Work in Russia: Year Three," Hoover Institution, April 2004.


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