The Flat Tax Spreads to Ukraine

May 27, 2003

By Alvin Rabushka


On May 22, 2003, Ukraine’s parliament, taking a page from Russia’s playbook, overwhelmingly voted into law a 13% flat tax on personal income to take effect on January 1, 2004. (See “The Flat Tax at Work in Russia”) The 13% flat tax replaces five brackets of 10, 15, 20, 30, and 40%. Dividends and interest on bank deposits will be taxed at a lower 5% rate beginning January 1, 2005. Following further in Russia’s footsteps, the tax rate on company profits was previously reduced, from 30% to 25% (see “Further Extending Russia’s Tax Reforms”). Ukraine’s finance minister is also seeking a reduction in VAT, from 20% to 15%.

News reports suggest that Ukraine officials consulted with their Russian colleagues. The advice they received was that incentives and revenue would rise and the underground economy and tax evasion would decline (see “The Flat Tax at Work in Russia: Year Two”).

Ukraine adds one more country to a growing list that have adopted a flat tax. The chronology is Estonia (implemented in 1994), Latvia (1995), Russia (2001), and now Ukraine (2004). Belarus intends to harmonize its tax code with Russia. A bill for a 20% flat tax (perhaps as low as 15%) on personal income is before Slovakia’s parliament in May 2003.

The opposition ODS - Civic Democratic Party in the Czech Republic has drawn up plans for a 15% flat tax on personal income, which has a top rate of 31%, and a 15% flat tax on corporations, down from 29%.

A planned May 2003 visit on my part to Beijing to discuss the flat tax with officials in the Ministry of Finance was postponed due to the SARS outbreak. A Chinese translation of The Flat Tax has been published by the China Financial & Economic Publishing House in May 2003. Chinese professors of public finance have written articles on the benefits of sharply reducing China’s top personal income tax rate of 45% to no more than 20%.

The Flat Tax at Work in Russia: Year Two

February 18, 2003

By Alvin Rabushka


On January 1, 2001, a 13% flat-rate tax on personal income took effect in Russia. (On the general principles and beneficial economic effects of the flat tax, see The Flat Tax.) Russia’s 13% flat tax replaced a three-bracket system, which imposed a top rate of 30% on taxable income exceeding $5,000.

During its first year, the 13% flat tax exceeded all expectations. In 2001, personal income taxes increased 46% in nominal rubles, or 28% in real rubles after adjusting for ruble inflation of 18%. Personal income tax as a share of consolidated budget tax revenue rose from 12.1% in 2000 to 12.7% in 2001. Since economic growth of 5.0% in 2001 was lower than the record 9.0% growth in 2000, the rise in revenue cannot be attributed solely, or even largely, to growth in 2001. For a detailed treatment of Russia’s 13% flat tax, see “The Flat Tax at Work in Russia.”

Data for 2002 are now available, posted to the Russian government’s Ministry of Finance web site. (Http://www.nalog.ru) Personal income taxes in 2002 amounted to R357.1 billion ($1=R31.7), up from R255.5 billion in 2001, an increase of 39.8%. Annualized average ruble inflation in 2002 was 15.8%. Thus, real ruble tax revenues rose 20.7%, another large increase. Moreover, economic growth of 4.3% in 2002 was lower than the 5.0% growth the previous year. Real ruble revenues continued to rise in 2002 despite slowing growth, suggesting greater compliance and efficiency in tax administration.

Since the implementation of Russia’s flat tax, personal income taxes have contributed a growing share of Russia’s consolidated budget. In 2002, the flat tax generated 15.3% of total tax revenue, up from 12.7% in 2001. From relative unimportance as a source of revenue a few short years ago, the 13% flat tax on personal income now exceeds excise taxes and taxes on natural resource use, and is fast catching up with corporate income tax and value added tax.

To date, the governments of Estonia, Latvia, and Russia have enacted flat-rate taxes on personal income. Russia has also implemented a reduction in the corporate rate of tax, from 35% to 24%, effective January 1, 2002. Russia has also enacted a flat-rate small business tax, the lesser of 6% of gross turnover or 15% of profits. (See “Further Extending Russia’s Tax Reforms,” “Tax Reform Remains High on Russia’s Policy Agenda,” and “Completing Small Business Tax Reform”) A Chinese edition of The Flat Tax is scheduled for publication by China’s Ministry of Finance in early 2003.

(Anjela and Diana Kniazeva, graduate students in the Department of Economics, Stern School of Business, New York University, provided research assistance for the preparation of this article.)

Completing Small Business Tax Reform

July 3, 2002

By Alvin Rabushka


On July 2, 2002, the Duma, the lower house of the Russian Parliament, concluded its business prior to the start of its summer vacation. Among the bills approved was a comprehensive reform of small business taxation. Once the measure is approved by the Federation Council, the upper house of Parliament, and signed by President Putin, the measure becomes law.

On May 22, 2002, I posted to this site an article entitled “Tax Reform Remains High on Russia’s Policy Agenda.” It described the government’s proposal. Small firms with fewer than 20 staff and turnover under R15 million ($477,100 at current exchange rates) could choose to remit the lesser of a 15% flat tax on profits or a 6% flat tax on turnover. Eligible businesses would enjoy exemption from value-added tax, sales tax, property tax, and social insurance taxes.

The measure approved by the Duma on July 2 retained the previous provisions on tax rates and turnover, but extended the number of employees in any eligible small business to 100. The benefits of qualifying as a small business are readily apparent since larger corporations are subject to a 24% profits tax.

We have commented on this site on all of Russia’s major tax reforms, especially the 13% flat tax on personal income (see “The Flat Tax at Work in Russia” and The Flat Tax). The personal income tax has been especially productive of revenue, with ruble receipts up 28% in real terms in 2001 compared with 2000.

On July 1, 2001, the senior deputy minister of finance reported that underpaid taxes to the federal budget in the first half of 2002 amounted to R 17 billion ($540.17 million). He acknowledged that collection of tax on the extraction of natural resources, income tax for individuals, and the unified social tax was satisfactory, but that the collection of value-added taxes and profits taxes was below projections. (See www.rbcnews.com/free/20020701140045.shtm) The reasons for the new small business tax are to improve incentives and compliance among these firms. With exemptions from value-added tax, sales tax, property tax, and social insurance taxes, small businesses will receive a substantial reduction in their tax burdens. Banking, insurance, and investment businesses are excluded from the small business tax reform.

Where can Russian tax reform go from here?

Additional simplification can be achieved by reducing the small business profits flat tax rate to 13%, which would eliminate the unnecessary distinction between sole proprietors and small businesses.

A more drastic measure would reduce the corporate income tax rate from 24% to 13%, thereby permitting full integration with the personal and small business taxes. This would enable all taxpaying entities to be treated equally in terms of the choice of legal ownership.

If it were necessary to maintain revenue neutrality, the government could raise the value-added tax by a few percentage points, or impose a higher natural resource extraction tax.

Recent rate reductions and simplifications have transformed a complex, high-rate tax system into a simpler, low-rate system. A few additional measures could complete the process of tax reform.

Tax Reform Remains High on Russia’s Policy Agenda

May 22, 2002

By Alvin Rabushka


On April, 2002, I posted to this site an article entitled “Further Extending Russia’s Tax Reforms.” It described the Russian government’s new proposal to radically simplify and reduce the tax treatment of small businesses. Under the plan, small business firms could choose to remit the lesser of a 20% flat tax on profits or an 8% flat tax on revenues. Firms that qualify—those with no more than 20 staff and turnover under R10 million ($320,000)—would also be exempt from value-added tax, sales tax, property tax, and social insurance taxes.

Thus far, Russia’s 13% flat tax on personal income (see “The Flat Tax at Work in Russia”), which took effect in 2001, has met its two major objectives of improving incentives and compliance. Building on it, the Russian government reduced corporate income tax rates from 35% to 24% in 2002. On May 21, 2002, the government further enhanced its small business proposal.

It widened the definition of a small business to include firms with turnover up to R15 million ($469,000), a 50% increase over the initial proposal of a few months ago. Small business firms could choose to remit the lesser of a 15% flat tax on profits or a 6% flat tax on turnover.

Note that the 15% flat tax on small business profits is close to the 13% flat tax on personal income, which encompasses sole proprietors. By reducing the 20% rate to 15%, the Russian government will make it easier in the future to equalize the tax treatment of small business income, eliminating the distinction between sole proprietor and small firms of 2-20 employees.

Further Extending Russia’s Tax Reforms

April 1, 2002

By Alvin Rabushka


The Russian government is in the process of further extending its tax reforms. A first step was the introduction of a 13% flat tax on personal income (see “The Flat Tax at Work in Russia” and “Improving Russia’s 13% Flat Tax”), which took effect in 2001. Second, it reduced the corporate tax rate from 35% to 24%, beginning January 1, 2002.

Now the Russian government is planning to simplify and reduce the tax burden on small businesses. Under the current proposal put forth by the Russian government, a small business is defined as having no more than 20 staff and annual turnover under R10 million (about $322,000 at the current exchange rate). The proposal would grant small businesses a choice between a 20% flat tax on profits or an 8% flat tax on revenues, whichever is lower, beginning January 1, 2003 (assuming Duma approval, which appears likely). This small business tax rate on profits partially splits the difference between the higher 24% corporate rate and the 13% personal rate.

Other changes in the tax treatment of small businesses will accompany the reduction in rates. Collection of the small business tax will shift from a monthly to quarterly basis, mirroring the reporting of estimated taxes for private entrepreneurs and professionals in the personal income tax. Accounting for tax purposes will change from an accrual to cash basis; taxes will no longer be collected on imputed or phantom income. Finally, small businesses will be able to expense their outlays on capital assets in place of the current depreciation system (along the lines of the Section 179 expensing provision in the U.S. Internal Revenue Code). These changes are expected to reduce accounting costs for small business enterprises.

The plan also exempts small businesses from value-added tax, sales tax, property tax, and social insurance taxes.

Assuming some version of this small business tax reform proposal is enacted by the Duma this year, Russia will have completed a major overhaul of its personal, corporate, and small business taxation within the short span of three years. Some opportunity for further simplifying the personal income tax remains (see “Improving Russia’s 13% Flat Tax”), especially reducing the 30% tax rate on dividends now that the corporate profits tax rate has been cut to 24% and there is no capital gains tax on the sale of Russian equities.