Behavioral Responses and the Distributional Effects of Personal Income Taxes
35 Pages Posted: 3 Nov 2012 Last revised: 7 Dec 2012
Date Written: October 30, 2012
Abstract
This paper simulates the distributional impact of the Russian personal income tax (PIT) following the flat tax reform of 2001 using data from the Russian Longitudinal Monitoring Survey. I decompose the change in the distribution of net income into a direct (tax) effect and an indirect effect. The indirect effect is further decomposed into evasion and productivity effects using existing estimates of these respective elasticities. As expected, the direct tax effect increased net income inequality. Changes in the pre-tax distribution (indirect effect), on the other hand, had a large negative impact on inequality thus leading to an overall decline in net income inequality. I also find that the tax-induced evasion response increased reported net income inequality while reducing consumption. To the extent that consumption approximates actual income, these results demonstrate that the PIT affects actual income inequality differently than it does reported income inequality.
Keywords: Income distribution, evasion, simulation, taxes, consumption
JEL Classification: D3, D63, H24, H26, H31
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