M.Melnichuk
All-Russian State Tax
Academy
Determination of the optimal settings for the tax
system in Russian regions
Effective tax system
is one of the critical factors for dynamic development of the national economy.
As known, [1-4] fiscal and
regulating tax functions are of antagonist nature to each other clashing the
growing state financial needs and entrepreneurs’ interests. Economic growth and
budget balance are the optimal mode for economical functioning from the
perspective of state regulation effectiveness.
Governments of most modern mature economies
have to balance. If the priority is the wellbeing of the budget, then due to
increased tax burden the economic growth slows down exerting a negative impact
on re-production capacities of enterprises winding up the business activity.
Thus, short-term gains may result in serious problems in the future.
If the state policy aims to achieve an economic rise by means of lessening the tax load, the budget starts losing some income which will negatively affect the social policy of the democratic state. However, in the future the growing production may expand the tax base and the lost income will be compensated in a while. Moreover, the total arrival of funds may rise.
Therefore, short-term budget interests contradict
the long-term production purposes of the entrepreneurs.
The problem of optimizing the settings of the
tax system may as a rule be resolved by identifying so-called Laffer’s points with
regard to a combined tax burden index. Moreover, the disagreement value of two
Laffer’s points is the main criteria and indicator of national fiscal system’s
effectiveness.
Fiscal regulation
logics may represent three goals or guiding principles.
First goal – ensure absence of contradictions
between manufacturer’s interests and the budget which may be proved by a
coincidence of Laffer’s 1st and 2nd type points: q*»q**. Second
goal – balance nominal fiscal load on the left arch of the Laffer’s production curve
so that the nominal fiscal load value is not more than Laffer’s 1st
type point: qN<q* . Third goal – establish taxation discipline to
mitigate the tax debts.
The basis for model analysis of fiscal climate
is production-institutional functions (PIF) [1-6] which are the generalization of a traditional apparatus of
production functions (PF) applicable to macro-level. The only difference is that
ordinary PFs use an output volume (as a rule GDP) as an endogenous indicator
and labour (number of the employed) and capital (basic assets) as micro-factors
whereas PIF macro-factors are supplemented by a variable characterizing the
institutional environment – medium tax burden (taxes imposed by the state in
the volume of GDP). Given that apart from technological (resource) aspect of the
economic growth (volumes and effectiveness of labor and capital) the model also
allows for institutional climate (tax burden), traditional PF transforms into
PIF accordingly.
Introducing PIF for review seems reasonable and
grounded. In fact, the connection between output and macro-factors are mainly
determined by the institutional climate in the economy. It is quite logical to assume
that all other technological conditions being equal, (volume of labour and
capital) a different level of tax burden will produce a different GDP. Taxes
participating in the formation of the system of stimuli of economic agents
directly impact the levels of business and therefore production activity of the
system.
To try out the functionality of PIF and determine
the results of econometric evaluation of three-factor PIF we used statistics from
2000 to 2006: Russia and Moscow and Khanty-Mansi AA – Yugra. This choice was determined
by the desire to use the maximum ultimate regions with a different set of factors
stimulating economic growth Y: for Moscow – this is a set of {I,W} and for
Khanty-Mansi AA-Yugra – the set is {I,Rm}, where: I – investments into basic
assets in value terms; W – salary fund; Rm – expenses for natural resources in
value terms. These two regions are the main basis for economic growth of the
country.
When forming retrospective statistic rows of indicators:
Y; I; W; Rm Goskomstat (State Statistics Committee) data published in the book
“Regions of Russia. Main characteristics of the RF subjects. 2007” were used. Evaluating the tax burden value, use was made
of the following data on collection of taxes, charges and other mandatory payments
to the RF budget published in the section “Finances”.
Definitely, we cannot but mention the specifics
of the economic growth in Russia. Results of calculations are stated in table.1.
(see initial data in appendix 1).
Table 1.
Fiscal and technological indicators of Russia’s
economy, %.
Scenario – {I,W} in
value terms.
Production function:
|
Year |
Laffer’s 1 type point (q*) |
Laffer’s 2 type point (q**) |
Actual tax burden (q) |
Elasticity
of replacement of investments for salary fund (E) |
|
2000 |
34.4526 |
36.6808 |
28.7161 |
-8.323 |
|
2001 |
34.4513 |
36.5779 |
30.0089 |
-8.345 |
|
2002 |
34.4523 |
36.5026 |
32.4901 |
-8.354 |
|
2003 |
34.4567 |
36.4473 |
31.2542 |
-8.356 |
|
2004 |
34.4535 |
36.4099 |
31.8512 |
-8.386 |
|
2005 |
34.4568 |
36.3496 |
39.6763 |
-8.379 |
|
2006 |
34.4587 |
36.4012 |
36,3032 |
-8.375 |
What peculiarities were natural for Russia’s economy
in the period of 2000-2006? First of all, we can see a high stability of
Laffer’s 1 type point – during 6 years its value ranged from 34.45 to 34.46%. Thus, fiscal variation during these
years amounted to just 0.01% and we can
evaluate the value of Laffer’s
1 type point in Russia with very high accuracy at 34.45%. The specified high stability of q*,
first of all, demonstrates the stability of the Russian producer’s psychology
as to maximum permissible costs. In this case, this value exceeds 1/3 of the produced
added value to some extent and is close to American empiric standard of 35%.
Secondly, Table 1 also demonstrates a very high
stability of Laffer’s 2 type point which fluctuated in the range of 36.40-36.70%.
Thus, the range was only 0.3% which considering the value of q** seems quite
narrow for such a fiscal indicator. Given
that the average value of q** made up about 36.50%, we can ensure that in the
short term (from 2000 to 2005) increasing taxes for the producer exerted only
positive impact on the Russian budget. Besides, the change of Laffer’s 2 type point had a very weak
tendency for lessening which means that the reliability of the tax constituent
of the country’s budget grew slowly but confidently.
Thirdly, the state policy’s effectiveness was
not the same in different sections of the period analyzed. Thus, for example, actual tax burden for the period
from 2000 to 2004 was lower than Laffer’s 1 type point, let alone Laffer’s 2
type point (Table 1.). In fact, the tax burden during this period in
Russia was moderate.
It should be noted that currently Russia (2000-2006) has started implementing a rational investment policy which boils down to depriving of old production capacities with their parallel replacement for modern equipment. During this period as compared to previous years we noted a dramatic increase of investments into basic assets. (see table Ï-3.1 Appendix. 1). Annual growth of investments into basic assets made up 12%.
As an addition to the above-said is the fact that
during 6 years the elasticity of replacement of investments for paid labor, above
all, had been negative which indicates a direct interconnection of key macrofactors,
secondly, invariable in terms of value (table 1). The second aspect shows that the
country has a labor-saving tendency of scientific-technical progress.
The main driving force of the Russian economy is quite an effective capital formed by investments into capital – deficit production factor. Labour is an auxiliary, just a necessary appendage to it and economic growth is ensured not only through fiscal encouragement of the producer but more through extensive growth of main capital.
Now let us start analyzing the economy of Khanty-Mansi
AA-Yugra the indicators of which are stated in table 2 (see initial data in
Appendix 1). The most interesting here are the following conclusions.
Table 3.
Fiscal and technological indicators of economy
Khanty-Mansi Autonomous Area - Yugra, Tyumen
Region, %.
Scenario –{I,Rm} in
money terms.
Production function:
|
Year |
Laffer’s 1 type point (q*) |
Laffer’s 2 type point (q**) |
Actual tax burden (q) |
Elasticity
of replacement of investments for natural resources expenditure (E) |
|
2000 |
51.0 |
52.93 |
32.46 |
-0.22 |
|
2001 |
51.04 |
52.937 |
35.23 |
-0.22 |
|
2002 |
51.06 |
52.938 |
45.43 |
-0.22 |
|
2003 |
51.07 |
52.935 |
41.40 |
-0.22 |
|
2004 |
51.09 |
52.936 |
55.83 |
-0.22 |
|
2005 |
51.03 |
52.937 |
73.98 |
-0.22 |
|
2006 |
51.02 |
52.935 |
57.89 |
-0.22 |
First of all, the economy of this region
is focused on recovery and sale of hydrocarbon material, mostly oil.
Considering favourable oil prices within this period (oil prices skyrocketed almost
8 times from 2000 to 2006), GRP growth was coupled with oil prices growth as annual
raw material recovery did not grow a lot physically within the period analyzed.
Secondly, Laffer’s 1 and 2 type points
and actual tax burden starting 2001 are far beyond the empiric standard of 35%
and on the average make up 48% and 50.5% accordingly. Therefore, Khanty-Mansi AA-Yugra
demonstrates the uniqueness of its ineffective tax regime from this point too.
Thirdly, we can observe the record
instability of a tax burden. Fluctuations of actual tax rates occurred in a
very broad range — 32.46-72.98% (this corresponds to a variation of more
than 100%). That is the state is adjusting its fiscal policy not to allow for
the producer’s behaviour but the
existing prices for energy carriers.
Fourthly, from 2004 the actual tax burden was
above Laffer’s 1 and 2 type points. The problem of excessive tax burden is
resolved not at the expense of its decrease but by means of massive boosting of
one of the macrofactors (recovered oil cost). However, this approach cannot be
long-term as the hydrocarbon material cost cannot grow permanently. As a whole,
Russia’s fiscal system within Khanty-Mansi AA-Yugra can be characterized as
destructive.
Moreover, high taxes hold back scientific-technical
progress (STP). It may seem that if the actual tax burden is more than Laffer’s
1 type point and, moreover, more than Laffer’s 2 type point, the economy should
collapse. However, you may not encounter this in practice as the economy may
develop extensionally. Thus, according to model (1) the output depends not only on tax load but also on volume of
macrofactors but they may increase regardless of tax rates. This is what happens
in Khanty-Mansi AA-Yugra where economic growth was ensured not only at the cost
of producer’s fiscal encouragement but also at the cost of extensive increase
in natural resources recovery.
The most interesting element of model analysis is Moscow economy. Here we can also highlight a few moments (Table 2.). See initial data in Appendix. 1.
Table 2.
Fiscal and technological indicators of Moscow
economy, %.
Scenario –{I,W} in
money terms.
Production function
(with a STP factor):
|
Year |
Laffer’s 1 type point (q*) |
Laffer’s 2 type point (q**) |
Actual tax burden (q) |
Elasticity
of replacement of investments for salary fund (E) |
|
2000 |
32.6792 |
33.8255 |
31.033 |
-6.502 |
|
2001 |
32.7143 |
32.8279 |
34.5589 |
-6.501 |
|
2002 |
32.7175 |
33.8083 |
29.0576 |
-6.503 |
|
2003 |
32.7291 |
33.7955 |
27.2767 |
-6.502 |
|
2004 |
32.7211 |
33.7694 |
21.5765 |
-6.504 |
|
2005 |
32.7272 |
33.7531 |
20.017 |
-6.505 |
|
2006 |
32.7217 |
33.7635 |
20.816 |
-6.503 |
Firstly, fiscal gap between Laffer’s 1 and 2 type
points is incredibly small and is about 1%
(Table 2.). Such a difference is within the limits of ordinary
statistic error. That means the budget reaction is almost equivalent to
producer’s reaction.
Secondly, given the tendency for coincidence of Laffer’s 1 and 2 type points , the selection of effective tax burden rate is significantly simplified. By 2006 reasonable tax burden rate was limited to 20% (Table 2.).
Thirdly, Moscow had a slow but reliable formation of fiscal oasis with a low characteristic tax pressure. Thus, from 2000 to 2006 except 2001, the actual tax burden was below Laffer’s 1 type point.
In analyzing Moscow economy, interweaving of
fiscal and technological factors is of special interest. Thus, the calculations
have shown that the actual tax burden should be within the range: TW<T<TI
(26%<T<32.7%). Table 2 shows that within all 7 years the actual tax
burden was strictly within this range, which indicates that the fiscal policy
in Moscow is ideally set up for achieving a maximum technological effect.
However, apart from high effect from macrofactor
I (investments to basic assets) Moscow economy also experiences a vigorous labour-saving
STP. This is testified by both a total factor production indicator (directly linked
to STP results) and an indicator of elasticity of replacement
of investments for labor with a value of –6.5. We did not see anything similar in other cases. Thus, Moscow economy shows a high social focus of
production and STP.
After carrying out calculations, we may
draw the following conclusions:
– all reviewed models show a growth
of economic development for all cases reviewed (Table 1-3, Appendix 1.One
of the main conditions of achieving such a high tempo of economic growth is to
re-direct significant financial resources from raw material to processing
sectors of economy. The state’s objective is to develop effective stimuli and
mechanisms for saving excessive financial resources of the energy & raw
material sector within the country.;
– We can see a field differentiation of tax
burden in Russia that is different fields and productions are not in the same
conditions in terms of fiscal pressure. It goes without saying that the specified bias in Russia’s fiscal policy
has nothing to do with the size of tax rates. Russia’s taxation system and,
above all, the tax base are designed so that some fields are put in more
favourable conditions than the others. This is one of the most important faults
of the modern fiscal system of Russia.
References
1.
Balatsky E.V. Evaluation
of fiscal instruments impact on economic growth “Forecasting Issues”, ¹4, 2004. P.124-135
2.
Balatsky E.V. Analysis of tax burden influence on economic growth by means of production-institutional
functions // “Forecasting Issues”, ¹2, 2003.
3.
Balatsky E.V. Invariance of Laffer’s fiscal points // “World economy and
international relations”, ¹6, 2003.
4.
Gusev A.B. Taxes and economic growth: theories
and empiric evaluations. M.: Economics and Law. 2003.
5.
Balatsky E.V. Re-production cycle and tax burden // “Economics and mathematical
methods”, ¹1, 2000.
6.
Balatsky E.V. Effectiveness of the state’s
fiscal policy // “Forecasting Issues”, ¹5, 2000.
Appendix.
Initial
data (Gosstat’s data)
|
Russia |
|||||
|
year |
Y |
L |
I |
T |
W |
|
2000 |
7306 |
65 |
1165 |
2098 |
1721 |
|
2001 |
8944 |
65 |
1505 |
2684 |
2526 |
|
2002 |
10831 |
66 |
1762 |
3519 |
3431 |
|
2003 |
13243 |
66 |
2186 |
4139 |
4355 |
|
2004 |
17048 |
66 |
2865 |
5430 |
5371 |
|
2005 |
21625 |
67 |
3611 |
8580 |
6857 |
|
2006 |
26883 |
67 |
4580 |
10626 |
8572 |
Y- GDP , bln. rubles.;
L – labour resources, mln. people.;
I – investments into basic
assets, bln. rubles.;
W – annual salary fund, bln. rubles.;
Rm – expenses for natural
resources, bln. rubles.
Moscow
|
|||||
|
ãîä |
Y |
L |
I |
T |
W |
|
2000 |
1159034 |
5653 |
156215 |
359693 |
219046 |
|
2001 |
1370183 |
5712 |
173839 |
473520 |
337522 |
|
2002 |
1767477 |
5832 |
220396 |
513585 |
447088 |
|
2003 |
2188231 |
5999 |
269588 |
596877 |
619992 |
|
2004 |
2853272 |
6079 |
358531 |
615635 |
775691 |
|
2005 |
4135154 |
6157 |
456025 |
801856 |
1065742 |
|
2006 |
5145874 |
6243 |
555772 |
1071078 |
1348309 |
Khanty-Mansi
AA-Yugra
|
|||||
|
ãîä |
Y |
L |
I |
T |
Rm |
|
2000 |
403822 |
792 |
107173 |
131071 |
320467 |
|
2001 |
497981 |
869 |
153710 |
175418 |
400650 |
|
2002 |
552484 |
878 |
157282 |
251019 |
464430 |
|
2003 |
717220 |
880 |
163212 |
296992 |
608549 |
|
2004 |
956177 |
874 |
192205 |
533922 |
840786 |
|
2005 |
1421371 |
877 |
223318 |
1051616 |
1285302 |
|
2006 |
1633288 |
879 |
298428 |
945460 |
1511714 |
Data for Moscow and
Khanty-Mansi AA-Yugra:
Y- GRP, mln. rubles.;
L – labour resources, thousand
people.;
I – investments into basic
assets, mln.rubles.;
W – annual salary fund, mln. rubles.;
Rm – expenses for natural
resources, mln. rubles.