Tax reform and economic growth

Abstract

For the Russian economy, the previous fifteen years have been a peculiar period of ongoing experimentation in fiscal regulation. Every year, the country's fiscal system was changed both qualitatively and quantitatively: tax rates, tax accounting and bookkeeping systems, sets of fiscal instruments and taxpayer requirements. The stated purpose of reforms was to normalize economic relations and to boost economic growth. In practice, however, the overwhelming majority of fiscal innovations have either had no influence on economic trends or aggravated the domestic producer's situation. The resulting paradoxical situation calls for the development of an adequate analytical apparatus for explaining the mechanism of the above-mentioned economic anomalies.Basic analytical construction: an economic growth model. In order to study the influence of fiscal reforms on the national economy, let us use a simple business growth model, which comprises four relations:(1)where F is fixed assets; X is the volume of revenue (production output); I is investment in fixed capital (capital investment); π is net profit; ν is the rate of capital retirement; g is capital productivity ratio; m is the proportion of net profit reinvested in fixed assets; r is the share of net profit in revenue; t is the time (year) index. The coefficients ν , g , m , and r act as model parameters and are assumed to be time-constant.Relations (1)-(4) can easily be reduced to a homogeneous difference equation) X t , = whose solution is given by the following exponential function:where X 0 is corporate revenue at start time.If a production growth rate characteristic, λ = X t / X t -1 -1, is introduced, then the following relation follows from formula (6), which is fundamental for our further analysis:Formula (7) relates the rate of economic growth to key reproduction characteristics of the company.Let us consider an obvious balance:where Z is total fiscal costs, i.e., the costs related to fiscal payments; U is other corporate costs (with the exception of total fiscal costs.) If we pass to the relative values of z = Z / X , u = U / X , and r = π / X , relation (8) can be written as (9) Formula (9) gives the dependence of the rate of return on fiscal and other costs. Further on, the coefficients u , z , and r can be treated as parameters. Combining relations (7) and (9), we obtain the basic equation:Therefore, the rate of economic growth depends on the rate of capital retirement ( ν ) and the productivity ( g ) of fixed assets, the average propensity to invest ( m ), the level of specific production ( u ), and fiscal ( z ) costs. 1 The gist of equation (10) is the formalization of the following regularity: any increase of total fiscal costs is actually a decrease in the company's financial assets 1 Equation (10) can be supplemented with additional factors. For example, if we write as λ = -ν + sm σ (1 -u -z ), where s = X / M is the efficiency of production capacities M ; σ = M / F is the utilization rate of production capacities.). + = Abstract -A conceptual framewo...

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