This tax will be temporary in nature, until the economy gets back on its feet after the war (Zhyla 2022).įiscal neutrality, the key requirement for support of tax reform by the International Monetary Fund (IMF), can be achieved if the flat tax expands the tax base by reducing the share of informal economic activity, estimated at 40-45% of all economic activity prior to the war (Keen et al. It is for this reason that the Ukrainian government is considering flat tax reform, known as the 10/10/10 initiative, to usher the introduction of a 10% flat tax on personal, corporate, and dividend income (European Business Association 2022). The high elasticity of taxable income with respect to tax rates found in the public finance literature implies deadweight losses arising from distorting labour supply and capital accumulation decisions (Feldstein 1995, Djankov et al. High personal income tax rates are also often associated with negative effects on economic activity.
It is well-documented that high personal income tax rates are partially responsible for tax evasion, especially in the emerging markets of Eastern Europe and the former Soviet Union (Miklos 2014). Tax evasion is a pervasive phenomenon in many emerging markets. Editors' note: This column is part of the Vox debate on the economic consequences of war.
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