The Impact of Tax Reforms on the Behaviour of Economic Agents (Indirect Taxation in Russia and the USA)

Abstract

The “turnpike hypothesis” proposed in this article suggests that the trajectory of GDP growth rates is a “turnpike”, which attracts tax revenues of any type. A significant deviation of the rates of tax revenue growth from the turnpike means that this tax has grown unresponsive to the dynamics of the global tax base – GDP. To test this hypothesis, the authors introduce the indicators of surplus return and volatility of tax revenues, which leads them to narrowing the definitions of such terms as budget orientation and efficiency of taxes. To analyze the behaviour of economic agents, the authors construct econometric dependencies of three indirect taxes (VAT, customs duties and excise taxes) on the tax rate (tax burden), GDP and the population income. For the VAT, the tax burden was its nominal rate; for excise taxes, the share of excise taxes in the retail turnover; for customs duties, the share of customs duties in the foreign trade turnover. The resulting models were used to calculate the elasticity of tax revenues, GDP and population incomes with respect to the tax burden, which is equivalent to the analytical expression of the way the three participants of the economic system – state (public budget), producers (business) and consumers (population) – react to the tax burden. To analyze the analytical coefficients and econometric models, the authors used the statistical data of Rosstat for Russia and of the OECD for the USA for the period between 1995 and 2017. The calculations show that the Russian and American tax systems contain taxes that are “insensitive” to economic growth. In Russia, these include the natural resource extraction tax, customs duties and contributions to extra-budgetary funds, and in the USA, excise taxes, property tax and customs duties. The study shows that the Russian economic crises in 2008 and 2014 had a remedial effect on the country’s tax system and helped it get closer to the turnpike of economic growth. The model calculations of the three kinds of elasticity showed that an increase in the VAT tax rate reduced the activity of the three participants of the economic system while an increase in the excise or customs duty burden, on the contrary, enhanced their activity. The conclusion is made that the turnpike hypothesis is confirmed for the majority of taxes both in Russia and the USA. It is also shown that those taxes for which the hypothesis is confirmed only partially are in urgent need of reformation. For citation Balatsky E. V., Ekimova N. A. The Impact of Tax Reforms on the Behaviour of Economic Agents (Indirect Taxation in Russia and the USA). Journal of Tax Reform . 2019;5(2):129–147. DOI: 10.15826/jtr.2019.5.2.064 Article info Received June 24, 2019 ; accepted July 21, 2019