Flatliners: Ideology and Rational Learning in the Diffusion of the Flat Tax

“flat” countries, leads to 0.24 (0.21) increase, which is lower than when there are seven
such countries. These results could suggest that the more countries adopt the tax, the
less on the right a government has to be to adopt the reform; if diffusion is strong enough,
adopting the flat tax may become more acceptable for center governments. Poland with
its ideology of 12.5 in 2005 comes very close to a predicted implementation of the flat
tax.³²

[FIGURE TWO ABOUT HERE]

Figure 2 provides another view of factors affecting tax policy changes. Using Model
C, we estimated the expected probability given increases by one standard deviation in
each predictor from its mean. The Figure plots averaged predicted values, together with
confidence intervals. If interval cross 0-line, the results are not statistically significant,
at 0.05 level. This visualization supports our story that radical changes in government
(ideology) and diffusion are the strongest factors to explain flat tax revolution: changes
in governmental ideology increase the predicted probability by 29 percent, number of
flat countries: by 36 percent, capital openness and FDI competition also have significant
effects.

We stipulated that the increases in FDI inflows into ‘flat’ countries make the latter
more attractive for their neighbors, and thus raise the probability of tax policy change
in the latter. We can evaluate whether the spatial lag weighted by FDI inflows into flat
countries has effects independent from the effects of FDI and spatial lag variables. In
Table 1, Model A includes only the FDI variable, B includes a spatial lag, and C both
of the former and spatial, FDI-weighted lag. We performed a likelihood-ratio test and
obtained a highly significant χ-squared of 32.3, which suggests that the increases in FDI
³²That said, running predicted probabilities for Poland adopting the flat tax in 2005 gives a prognosis
of only 14 percent; see the conclusion for details.

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