The Impact of Flat Taxes on Income and Wealth Inequality

Talk by Michal Brzezinski (University of Warsaw) as part of the Research Seminar Series of the IOS Economics Department.

We study the inequality consequences of flat tax reforms introduced since the 1990s in 25 countries across Central and Eastern Europe, Central Asia, and other regions. Using newly constructed, comprehensive income and wealth inequality databases and the local projection difference-in-differences methodology, we analyze their impact. Our primary finding is that flat tax reforms redistribute income from middle-income taxpayers to high-income earners, with minimal effects on low-income groups. Specifically, we observe that flat taxes result in increased (pre-tax and post-tax) top income shares and declining middle income shares. Although the impact on wealth inequality is less pronounced, we find some evidence of increased top wealth shares and reduced middle wealth shares within the first 3-4 years following the reforms. While flat taxes may have stimulated economic growth, as suggested by other studies, our results highlight that this growth has come at the cost of exacerbating economic inequalities.