Abstract:
Flat tax systems have gained traction in countries that transitioned from socialism, with more than 20 nations in Eastern Europe and Central Asia adopting such systems since the mid-1990s. These reforms aimed to streamline tax processes, enhance compliance, and boost economic growth. While researchers have extensively explored their impacts on GDP and labor markets, their distributional consequences have not been as thoroughly examined. This paper examines the impact of flat tax reforms on income and wealth inequality in post-socialist countries, employing a variant of the difference-in-differences method. Our analysis covers a panel of countries from 1994 to 2015, assessing changes in top, middle, and bottom income and wealth shares. Our findings show that flat tax reforms have significantly increased income inequality, with top income shares rising and middle-income groups losing relative share. These effects are particularly pronounced for post-tax income, reflecting the role of reduced tax progressivity. In contrast, the impact on wealth inequality is more limited. While top wealth shares increase slightly in the short run, these effects do not persist, suggesting that wealth accumulation is driven more by structural factors than income tax changes. Although flat tax reforms may have stimulated economic growth, their regressive distributional effects suggest that, in societies with strong inequality aversion, their overall social welfare impact may be negative.