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

under various circumstances, not on the adoption of particular tax regimes. Finally, diffu-
sion processes have long been a subject of research in the social sciences, but empirically
identifying the causal mechanism behind the spread of ideas has proven challenging.

We join the literature on the implementation of economic reforms that finds that
politics matters for economic policy adoption.³ We take the adoption of the flat tax in
Eastern Europe as a natural experiment, where a rare constellation of a fluid environment
for policy change as well as policy competition created conditions that made adopting
the flat tax persuasive. In fact, the policy’s obvious fit for the circumstances of the region
made the case for adoption rationally compelling to policymakers. Though it is almost
impossible to identify the trigger for the first country to adopt the flat tax, prediction
becomes somewhat easier once diffusion kicks in.

We draw from the literature on the determinants of taxation as well as the literature
on policy reform more generally to model the adoption of the flat tax as a process of
policymakers’ rational learning. Tax systems are vastly complex, and empirical and
formal work - not all of it unified - has been done on taxation levels, value-added tax,
social transfers, the ability to collect taxes, and non-tax incentives to attract revenue.
Here we focus on the adoption of the flat tax as a previously rare event that now is close
to becoming the standard for the region. We find that other types of policy reform do not
predict adoption of the flat tax, nor do most of the variables in the standard models of
taxation levels (save capital mobility). Given the right ideological environment, the flat
tax has taken off in Eastern Europe not as a result of blind imitation, but by policymakers
rationally updating their beliefs about the tax’s appropriateness for their own country.

³For example, on central-bank independence, see Franzese (1999) and Lohmann (2000); Franzese
& Hays (2006) on labor market reforms; and Leblang (1999) and Cohen (1998) on determinants of
exchange-rate regimes.

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