Evaluation of Russian Economic Sectors’ Sensitivity to Tax Burden

Abstract

This study tests the hypothesis that Russia’s economic sectors have different sensitivity to tax burden. Econometric models are built to explore the relationship between production in different sectors and the tax burden on these sectors. We use employment growth, labour productivity growth and world oil prices growth as control variables; to neutralize crisis effects we introduced a binary dummy variable. A peculiar feature of our models is that we build a certain a priori non-linear fiscal aggregate, which appears as one variable in an econometric dependency and comprises one or two exogenous parameters. This enables us to test the hypothesis about the non-linear impact of tax burden on production and to avoid the multicollinearity problem. The parameter of the non-linear fiscal aggregate can take different values as we build the econometric dependency, which means that we can conduct a lot of computational experiments to choose the most adequate model. The econometric models use statistical data of Rosstat and the Federal Tax Service of Russia for the period of 1996–2019 for the whole economy and for the period of 2006–2019 for specific sectors. For this study we have chosen the manufacturing and extractive industries, manufacture of coke and refined petroleum products, chemical industry and electrical engineering. To gain a bigger picture, we have also considered the public service sector– education and health care. Model calculations have shown that the main indicator reflecting the sectors’ sensitivity to tax regulation is the width of the corridor of permissible values of the tax burden in the parabolic dependency (permissible in the meaning that such tax burden provides a positive production growth in the sector): ∆q = q00 – q0. The lower is ∆q, the more sensitive is this sector to any tax increase. The use of additional indicators – q (effective tax burden), q* (optimal tax burden) and l* (potential production growth if the tax burden is optimal)– has shown that the more technologically advanced is the sector, the more sensitive it is to the tax burden. Moreover, the more technologically advanced is the sector and the more sensitive it is to fiscal regulation, the faster its development can be, provided that the tax rates are optimal. Thus, a possible solution is to apply a differentiated taxation system for economic sectors. All developed countries apply progressive personal income tax scales, which shows awareness of the differences in income groups’ sensitivity to taxes. Theoretically, nothing could be said against applying a similar principle to economic sectors with different levels of technological intensity and innovation and with a different sensitivity to tax burden. A differentiated tax system can be applied for economic sectors if certain conditions are met and specific procedures are established and followed. For citation Balatsky E.V., Ekimova N.A. Evaluation of Russian Economic Sectors’ Sensitivity to Tax Burden. Journal of Tax Reform. 2020;6(2):157–179. DOI: 10.15826/jtr.2020.6.2.080.  Article info Received June 22, 2020; Revised July 14, 2020; Accepted July 21, 2020