Political tax cycles: Cyclicality of the tax burden in election periods

The article discusses changes in the tax burden in election and post-election years in countries with different levels of economic and political development. The study uses the data on 121 countries for the period between 1991 and 2019 to test two hypotheses: 1) in election years, governments tend to boost spending while in post-election years government expenditures decline, which determines a similar dynamic of the tax burden; 2) in election years the tax burden decreases and in post-election years it either increases or decreases at a slower rate than in election periods. Methodologically, the study relies on multi-factor regression analysis of panel data. As a result, the first hypothesis is confirmed for high-income countries where the governments increase their spending to ensure the incumbent’s re-election and cut their expenditures after the election. In developed countries, in election years, the government’s spending was 0.4% higher than in other periods. In developed countries, governments were motivated to raise rather than reduce the tax burden in order to compensate for their increased expenditures. No common pattern of declining tax burden in election periods was detected for all observed countries, for groups of countries by income level (high-income, middle- or low-income) or for groups of countries by political regime type (democratic and non-democratic– hybrid or authoritarian). However, the analysis of the annual data on taxes has shown that the decline in the tax burden can occur in countries with developing economic and political systems as was the case with Armenia, Russia and Ukraine in 1992–2019. In general, the findings demonstrate that the governments are more prone to using monetary and fiscal rather than tax instruments in election periods.

Evaluation the impact of the personal income tax reform in the Czech Republic in 2021 on effective tax rate and tax progressivity

Legislation governing personal income taxation is often subject to changes. A significant personal income tax reform was carried out in the Czech Republic in 2021. The reform implements a progressive tax rate, changes the way the tax base is determined, and increases the tax relief for the taxpayer. The aim of the article is to evaluate the impact of the personal income tax reform on the effective tax rate and tax progressivity. To that end, methods of regression analysis have been used. The source of information for analysis was the data published by the Czech Statistical Office. It was found that in 2021, in comparison with 2020, the tax burden represented in this study by the effective tax rate, in all cases became lower, approximately by 5%. The main reason for this decline is the adjustment of the method of construction of the tax base, which, for the first time in the history of the Income Tax Act, is gross wages. Until the end of 2020, the tax base was a super-gross wage, or the gross wage increased by social security contribution borne by the employer at his costs. The second factor that reduces the tax burden is a CZK 3,000 increase in the deduction per taxpayer per year. This fact increases the degree of tax progressivity, as confirmed by the results of the progressivity analysis and the regression analysis. The changes that have taken place in the personal income tax this year have a positive impact on the taxpayer, but from the point of view of the state, this reform has reduced the state budget revenues.

Taxation, government spending and economic growth: The case of Bulgaria

The objective of this article is to estimate the impact of three fiscal instruments (direct taxes, indirect taxes, and government expenditure) on Bulgaria’s economic growth. The study employs an autoregressive distributed lag model (ARDL) and Eurostat quarterly seasonally adjusted data for the period 1999–2020. Four control variables (the shares of gross capital formation, household consumption, and exports in GDP as well as the economic growth in the euro area) are included in the model to account for the influence of non-fiscal factors on Bulgaria’s real GDP growth rate. The empirical results indicate a long-run equilibrium relationship between Bulgaria’s economic growth and the independent variables in the ARDL. In the short term, Bulgaria’s real GDP growth rate is affected by its own past values and the previous values of the shares of direct tax revenue, exports, government consumption, and indirect tax revenue in GDP. In the long term, Bulgaria’s economic growth is influenced by its own previous values and the past values of the share of household consumption in GDP and the euro area’s real GDP growth rate. Fiscal instruments can be used to stabilize Bulgaria’s growth in the short run but they are neutral in the long run. The direct tax revenue, government consumption, and indirect tax revenue are highly effective and can be used as tools for invigorating and stabilizing Bulgaria’s economic growth in the short run. However, in the long term, the real GDP growth rate can be hastened only by encouraging domestic demand (final consumption expenditure of households) and promoting exports. This research cannot answer the question of whether flat income taxation stabilizes the economy or not, since it does not separate the impact of tax rate changes from the influence of tax base modifications.

Assessment of the effectiveness of anti-COVID tax support for innovation activities of small and medium-sized enterprises in OECD countries

The global economy has rebounded from the lows of 2020, but its recovery will depend on innovations. Therefore, it is important to identify the most effective tax support instruments for the innovation activities of small and medium-sized enterprises (SMEs) that are used in the framework of anti-crisis economic policies in the OECD countries. It is suggested that tax incentives are the most effective tax instrument of all; the effectiveness of the profit tax benefit depends on the SME’s profitability; as to the social insurance and pension contribution, there is an allowable minimum of the rate, determined by the level of wages, that will stimulate innovation. To assess the effectiveness of tax support tools, the study used the methods of linear multivariate regression and simulation in Simulink. The source of information for regression analysis was the data published by the World Bank and the Organization for Economic Cooperation and Development (OECD). It was concluded that the most effective measures of tax support are tax incentives, as well as deferred payment of social insurance and pension contributions. The 10% profit tax was shown to be optimal to stimulate innovation provided the company keeps the saved profit for development. For innovative SMEs, the minimum allowable contribution rate for social insurance and pension provision, which stimulates their innovative activities, is 12%. The results of modeling confirmed that the proposed threshold indicators for supporting SMEs’ innovation activity can be an effective tool for overcoming the consequences of the global crisis caused by the COVID-19 pandemic.

Underground economy and GDP growth: Evidence from China’s tax reforms

Since 1991, China has implemented two significant tax reforms. The first reform, in 1994, was a large-scale adjustment of the tax distribution system between the central and local governments, and the second reform, in 2012, replaced business tax with value-added tax. Also, the size of China’s underground economy decreased from 13.55% in 1995 to 12.30% in 2016. The paper presents an evaluation of the effect of the two tax reforms and the existing underground economy on GDP growth in China. GDP is defined as explained variable, the explanatory variables include: the ratio of declared income to actual income, the change of concealed income, and the influence of tax rate change on declared income and concealed income. According to the tax reform in 1994 and 2012, two dummy variables are set respectively. In methodology, this paper uses Simultaneous equations model, SUR-OLSs and Slutsky identity. Our estimation is based on the official statistics of China National Bureau of Statistics in the period from 1991 to 2019. In empirical analysis, we decomposed tax changes into tax rate effect (change of budget constraint slope) and income effect (change of tax liability), then analyzed the impact of tax elasticity on GDP growth. The empirical results demonstrate that both the 1994 tax reform and 2012 tax reform have had a positive impact on GDP, with high statistical significance respectively. The results also confirm that the increase of tax rate leads to the increase of hidden income, which eventually leads to the decrease of GDP. The offered methodology can also be applied to most countries for time series analyses.

Tax burden and shadow economy growth in Russian regions

The study is devoted to verification the hypothesis that a higher tax burden does not necessarily lead to the growth in the shadow economy in Russian regions. The cross-regional comparative analysis was undertaken to measure the influence of the tax burden on the shadow economy. The analysis used Rosstat workforce surveys data about the number of informal workers nationwide and by sector from 2007 to 2019. Stochastic factor analysis was used to examine the relationship between the share of informal workers and such factors as the tax burden, GRP per capita, advanced production technologies, innovation activities of organizations, industrial sectors’ and social sectors’ contribution to GRP. To determine the strength of the relationship between the factors and the resultant indicator, a correlation and cluster analysis were conducted. It has shown that there is an inverse correlation between the tax burden and informal employment. Regions with a lower tax burden tend to have higher rates of informal employment (in 2019, the correlation coefficient was –0.4274). A similar inverse correlation is observed for the level of informal employment and the macro-economic indicators – GRP per capita, innovation, and the contribution of industrial sectors to GRP. There is a direct correlation between informal employment and the contribution of social sectors to GRP. These findings shed light on the key factors conducive to the growth in the shadow economy: what matters most is the economic and innovation lag in the development of certain regions. The results of this research can be useful for policy-makers seeking to address the problem of the shadow economy in regions.

Fiscal policy and economic growth: Evidence from Central and Eastern Europe

This study aims to estimate the impact of three fiscal instruments (direct tax revenue, indirect tax revenue and government consumption expenditure) on the economic growth of ten new European Union member states from Central and Eastern Europe– Bulgaria, Czechia, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia and Slovenia. We examine the hypothesis about the effect of expansionary fiscal policy on economic growth. The study employs a vector autoregression and annual Eurostat data for the period 2007–2019. Four control variables (the shares of gross capital formation, household consumption, exports in GDP, and the economic growth in the euro area) are included in the model to account for the influence of non-fiscal factors on economic growth. The empirical results indicate that the real output growth rate in the ten new member states of the European Union is negatively affected by direct tax revenue, while economic growth in the euro area, exports and gross capital formation are positively related to economic growth. The results also imply that government consumption and indirect tax revenue have no significant impact on the growth rate of real output of the ten studied countries from Central and Eastern Europe. It may be inferred that policymakers in the new European Union member states can raise economic growth by encouraging exports and investment and by lowering the share of direct tax revenue in GDP. From the three analyzed fiscal instruments (direct taxes, indirect taxes and government consumption expenditure), only one has proven to be effective in the case of the new member countries.

Long-run equilibrium between personal income tax and economic growth in Bulgaria

The study analyzes the relationship of personal income tax and economic growth in the long and short runs to show which type of income tax (progressive or proportional) is more compatible with Bulgaria’s economic growth. The methods of Vector Error Correction and Correlation are applied to determine the long-run and short-run impacts of the two types of income tax. The research covers the period from the first quarter of 1999 to the first quarter of 2020. Eurostat data (85 observations) were used. The empirical research has been divided into two periods. The long-run and short-run relationships between economic growth and tax revenue from progressive income tax in Bulgaria have first been studied, followed by the relationship between economic growth and the tax revenue from proportional income tax. The research results show that there is a long-run equilibrium relationship, but not a short-run relationship, between personal income tax and economic growth. The results imply that the progressive income tax is more compatible with economic growth than proportional income tax in Bulgaria in the long run. In the short run, the progressive income tax and proportional income tax have not shown statistically significant relationships with economic growth. Therefore, a progressive income tax leads to greater economic growth than a proportional income tax. From a long-run equilibrium standpoint, it is advisable that Bulgaria switch from proportional to progressive income taxation. It may be inferred that progressive taxation is more appropriate for economic growth than proportional taxation. The results are in conformity with the theory of endogenic growth and reject the neoclassical theory.

Introduction of the personal tax-free allowance in Russia and its budget implications

The social problem of poverty can be mitigated by introduction of a personal tax-free allowance. In this paper the likely effects that a personal tax-free allowance will have on the Russian budget is investigated. It has been assumed that a tax-free allowance will hit regional budgets because they depend greatly on income tax revenue. The indicated effects were estimated by applying a personal tax-free allowance to the data on economic conditions in 2019. Rosstat data on population, poverty, wages and gross regional product and Federal Tax Service data on the number of taxpayers and personal income tax revenues were used. For the purpose of the paper, two scenarios were calculated. In the first scenario, a zero personal income tax rate is applied to wages below the minimum cost of living. We found that under this scenario the consolidated budget of Russia loses over 1 trillion rubles while regional tax revenues reduce by more than 10%. In the second scenario, citizens whose income is below the minimum cost of living are exempt from personal income tax. We found that under this scenario regional tax revenues would be reduced by 1-5%. In both cases the introduction of the personal tax-free allowance puts greater pressure on regions that critically depend on the personal income tax receipts. It was concluded that the negative effect of an introduction of a personal tax-free allowance would be greater, the greater the prevalence of low-income taxpayers in a region. Also considerable regional disparities create a risk that such tax reform will deepen regional inequality and be disruptive for the Russian budgetary system.

Modelling of a relative income tax bracket-based progression with the effect of a slower tax burden growth

This study aims to model the distribution of the tax burden in schedular progressive taxation and to describe the key characteristics of such models, in particular their differences from the models based on continuously increasing smooth functions of the relationship between the tax burden and the taxpayer's income. Our hypothesis is that the use of the Gompertz function to model the main indicators of tax burden distribution of the schedular progressive income tax will help us approximate and formalize the distribution of the tax burden in a relative income tax bracket-based progression. Our research relies on the hypothetico-deductive model, more specifically, on mathematical hypothesis testing. The methodological framework comprises models of progressive taxation and mathematical methods, including data approximation based on the use of the Gompertz function, analysis of the antiderivative and convexity of functions and their properties. The resulting model can be used to describe the dynamic characteristics of the relationship between the tax burden and certain parameters of schedular taxation. This model can help identify the level of income beyond which the progression of the tax burden becomes formal and does not generate commensurately high revenue growth. The existence of such income level results in what can be considered the key drawback of the relative progression in question – the impossibility to provide a significant difference (step) of the tax burden progression in the whole interval of the taxpayer's income. What makes this research practically significant is that the proposed methodology allows us to take into account the actual tax burden in modelling the parameters of the relative progression.