We examine the effects of Russia's 2001 flat rate income tax reform on consumption, income, and tax evasion. We use the gap between household expenditures and reported earnings as a proxy for tax evasion with data from a household panel for 1998-2004.We associate large and significant changes in tax evasion following the flat tax reform with changes in voluntary compliance. We develop a consumption-based framework to assess the deadweight loss from income tax in the presence of tax evasion and showthat the efficiency gains. We would like to thank the editor, the anonymous referee, Alan Auerbach, Raj Chetty, John Earle, Brian Erard, Jonathan Feinstein, Caroline Hoxby, Anna Ivanova, Michael Keen, Alexander Klemm, Patrick Kline, Wojciech Kopczuk, Emmanuel Saez, Joel Slemrod, seminar participants at Stanford, University of California, Berkeley, NBER Public Economics, the Upjohn Institute for Employment Research, the Kyiv School of Economics, the 2009 American Economic Association meeting in San Francisco, and the Andrew Young School conference, Tax Compliance and Tax Evasion, in Atlanta for useful comments. We are also thankful to Ben Miller for research assistance. Sabirianova Peter acknowledges the research support from the National Council for Eurasian and East European Research and a research initiation grant from Georgia State University.
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