Flatliners: Ideology and rational learning in the adoption of the flat tax

Abstract

What factors explain the wave of adoption of the flat tax in Eastern Europe? It is argued in this article that, once the first few successes were underway, governments with liberal outlooks toward taxation adopted the reform through a process of rational learning: an often radically new government will tend to adopt the policy based on successful implementation of its neighbours. The issue of policy diffusion is approached by explicitly modeling the different mechanisms that might underlie the process. Little evidence is found for pure ‘bandwagoning’ in the adoption of the flat tax – the presence of other market‐minded reforms do not predict adoption of the flat tax, and contagion measures do not capture the dynamics of the adoption of the reform. Instead, rational learning, where economically right‐wing governments evaluated the success of the reform (as measured by their ability to attract foreign investment) in the medium term, plays the largest role. Rational emulation in a shorter time period contributes to the probability of adoption as well, as does a change to an economically liberal ideology.

How Socialization Attenuates Tax Competition

“…29 Braun and Gilardi 2006;Simmons, Dobbin, and Garrett 2006;Dobbin, Simmons, and Garrett 2007;Gilardi 2012. 30 Some studies have examined the role of learning in the diffusion of tax policies (Baturo and Gray 2009;Jensen and Lindstädt 2012). functions and organizational capacity. 31 On the one hand, IGOs are seen as more conducive to socialization if they carry out specialized functions in specific fields than if they are generalpurpose organizations in broad areas.…”

Estimators of Binary Spatial Autoregressive Models: A Monte Carlo Study

“…To choose the values for parameters that are specific to particular estimators— q and c in the Gibbs sampler, initial values in Gibbs and EM, the convergence criterion in EM, and the number of iterations in the Gibbs, EM, GMM, and RIS estimators—we ran a small number of simulations until we obtained reasonable results. The final decision for the values of the parameters is furthermore based on the literature on the estimators discussed in this paper (e.g., McMillen, ; Beron and Vijverberg, ; Klier and McMillen, ), and that on policy and regime diffusion (e.g., Gleditsch and Ward, ; Baturo and Gray, ). For the maximization procedure in the EM, RIS, and Pinkse and Slade () estimators, we use the optim() function in R with a maximum number of iterations of 1,000.…”

“…In applied work in economics and political science, there is increased attention to the importance of spatial or network interdependence between observations. Many applications with such models can be considered-including the contagion of currency crises (Novo, 2003), firm-level decision-making on locations (Autant-Bernard, 2006), ecological studies of spatial distributions of plants (Collingham et al, 2000), studies in policy diffusion such as flat taxes (Baturo and Gray, 2009), antismoking laws (Shipan and Volden, 2006), or pension privatization (Weyland, 2007)-across academic disciplines such as economics, political science, sociology, ecology, planning, or even neurology.…”

Leaning Right and Learning From the Left

“…One assumption that we make in our model is that governments are operating in an environment of imperfect information on the specific impact of tax changes on investment (the elasticity of capital to taxes). Alternatively, governments could learn from the tax experiences of others by observing how FDI responds to tax reductions in other countries (see, e.g., Baturo & Gray, 2009;Volden, Ting, & Carpenter, 2008). Thus, although governments can make reductions in taxation to increase investment, existing scholarship has debated the magnitude and overall effectiveness of corporate tax reductions in increasing investment.…”