The Impact of Indirect Taxation on Inequality in Russia

Abstract

The purpose of this study is to consider the effects of indirect taxes, VAT in particular, on inequality. The study tests the hypothesis that indirect taxation in Russia does not have a significant impact on inequality but has a potential to reduce it. Methodologically, the study relies on correlation regression analysis, time series analysis, structural analysis and the index method. The data used for the analysis are provided by the Federal State Statistics Service (Rosstat) and Federal Tax Service for the period from 1992 to 2021. Calculations were conducted with the help of Data Analysis ToolPak in MS Excel. A classification of the types of economic inequality is proposed together with the corresponding fiscal instruments used to tackle each type. Indirect taxes are considered to be capable of reducing consumption inequality. To evaluate the influence of indirect taxation on inequality, the following parameters were considered: VAT-to-GDP ratio and the share of VAT in total tax revenues of the consolidated budget, share of revenue raised through 10% VAT in the total volume of VAT, and the decile ratio of consumption spending. It was found that indirect taxes in Russia do not have a significant impact on inequality. Although in some years VAT receipts accounted for a larger share in total tax revenues and in GDP and this trend was accompanied by lower levels of inequality, this happened because of the influence of other factors, for example, the use of the progressive scale of the personal income tax in the 1990s. To reduce inequality, a viable solution for the government would be to apply a system of differentiated VAT rates to balance disparities in consumption of the wealthiest and poorest households (these differences are reflected in Rosstat data on consumption). Moreover, since utilities, telecommunications and food constitute up to 70% of the poor’s expenditures, it would make sense to lower the VAT rate for these categories of goods and services while raising the rate for such categories as hospitality services, cafes and restaurants, recreation and leisure services because in total, these categories account for 13.2% of the expenditures of the wealthiest households. Unfortunately, in 2022, the government took the decision to apply zero-rated VAT to these services as part of the anti-crisis program.