it easier to pay than to risk cheating.8 One senior government tax official estimated that
before the flat tax took effect at the beginning of 2001, Russians on average had declared
as little as 25 percent of their income.9 Ukraine swiftly followed suit, introducing a flat
individual income tax of 13 percent, and reducing the tax rate on corporate profits from
30 to 25 percent.
The trend continued with Serbia introducing in 2003 a 14 percent flat tax rate on
personal income and corporate profits, making it the lowest corporate profit tax rate
in Europe. Serbia had 106 different taxes before introducing the flat tax—one of the
first reforms the new government instituted.10 Slovakia (whose prime minister Miklos
Dzurinda frequently cited Estonia’s Laar as a mentor) adopted a 19 percent flat income
and corporate tax rate on Jan 1, 2004, replacing an old system that included 90 exceptions,
19 sources of un-taxed income, 66 tax-exempt items, and 27 items with specific tax rates.
In 2005, flat tax reform continued to roll with Romania and Georgia going flat.
[FIGURE ONE ABOUT HERE]
Figure One shows the variation in individual taxation levels in the postcommunist
countries. The top marginal income tax rates have declined in the past 15 years, from
40.9 on average in 1993 (standard deviation 7.56) to 28.9 (standard deviation 11.92) in
2005, yet the average rate was relatively stable in 1990s, and there are no visible regional
differences between EU accession states and the others. For example, the countries with
the highest levels of taxation are relatively rich EU member Slovenia and unreformed
Belarus.
In a possible reversal of the policy catch-up that was part of EU accession, some
8 As discussed in the theory section, this is a common motivation for adopting a flat tax in Eastern
Europe; data on tax evasion as well as tax compliance are unfortunately difficult to come by, however,
so verification of these claims is largely anecdotal.
9 “A Flat Tax Is Taking Root in, of All Places, Russia.” Newsweek, May 26, 2003
10Author interview, Dragana Djurica, SIEPA investment agency, 18 July 2006.