Flatliners: Ideology and Rational Learning in the Diffusion of the Flat Tax

What factors explain the wave of adoption of the flat tax in Eastern Europe — a policy that was all but unmentionable in the rest of the world? We argue 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 neighbors. Our contribution to the literature on the political economy of taxation is threefold. First, we show that, both theoretically and empirically, the existing work on taxation does not apply to the flat tax revolution in the post-communist countries. Second, we take into consideration the need and the difficulty of measuring ideology of Eastern European political parties. Third, we approach the issue of policy diffusion by explicitly modeling the different mechanisms that might underlie the process. We also find that the presence of other market-minded reforms do not predict adoption of the flat tax.