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

proxy for their overall aptitude.⁶

Our analysis starts with a background on the trajectory of the flat tax revolution in
Eastern Europe. We then turn to the literature on taxation and policy reform to show the
inadequacy of not only taxation studies but also of many of the most influential works on
diffusion in explaining the flat tax wave in post-communist countries. After a discussion of
the data as well as the methods used to analyze it, we test two models’ ability to explain
variation in the adoption of the flat tax, taking into account these alternate theories.
We find strong support for a rational learning framework of diffusion: an often-radically
new government will tend to adopt the policy based on successful implementation of its
neighbors. The last section concludes with a discussion of policy implications and steps
for future research.

2 Flatliners

First, a definition: a flat tax regime means that every taxpayer is taxed at one, typically
low, rate. The arguments in favor are several, including incentives to pay rather than to
evade, as well as a reduction of costs in processing. In the 19th century most countries
had a system of flat taxation, but the 20th century witnessed the gradual growth of the
welfare state, with a majority of countries converging on progressive taxation.

Although the flat tax idea has been championed extensively among many libertarian
economists, as well as discussed in the context of debates on tax cuts at the national
policy level in the U.S. and other advanced democracies (Hall & Rabushka, 1995), it has
been dismissed as politically infeasible, usually because potential taxpayers at the lower
end of the spectrum want to be taxed less themselves, and to have the rich bearing a
⁶See Chaudry (1997) on the Middle East and Cheibub (1998) on Africa.

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