The chief disadvantage for the society which may result from the adoption of this procedure is that real small businesses will be taxed either at 6 per cent of gross incomes or per cent of net incomes. At the same time those able to create several enterprises specifically to misuse the tax base may achieve a decrease in effective rate to 6 per cent of net incomes (in the case that according to documents relate to the enterprise choosing incomes minus expenditures or profits as the object of taxation, while the excess of profits over expenditures is received by the enterprise whose object of taxation is income). Therefore, small enterprises may have to compete with medium-sized enterprises more bitterly than in the case the general regime were extended to all taxpayers. So, these measures fail to ensure the main goal of the reform – creation of favorable environment for small businesses.
Yet another important issue shall be stressed. Rates of simplified taxes on small businesses are low, potential of tax evasion is not eliminated, threshold parameters of eligibility to use simplified regimes are high. Besides, these measures will negatively affect not only revenues from the profit tax, but also income tax and the single social tax. A decline in budget revenues is inevitable both at the federal and regional levels. However, the respective decision was taken by the State Duma, not regional or local authorities. In this situation it would be feasible that the federal budget assumes the greater responsibility for the decision. For instance, the lowered rate could be reviewed as the refusal of the federal budget to receive its share of the tax. Besides, it would be right if the major part of (or all) tax revenues is transferred to local budgets.
Article 26.3 “Taxation system in the form of single tax on imputed incomes as concerns certain types of activities” of the Tax Code introduces the new procedure of collection of the tax on imputed income.
As compared with the previous procedure, the changes may be viewed as positive.
There were excluded the types of activities primarily used to sell products to other enterprises. Household services are the major subject of the tax on imputed income. The new procedure may help to prevent tax evasion in the form of rise in expenditures due to purchases of services from enterprises subject to the imputed tax. Besides, there were excluded INSTITUTE FOR THE ECONOMY IN TRNSITION http://www.iet.ru the types of activities subject to stricter control not relating to taxation (for instance, gathering and sale of non-ferrous metal scrap). The procedure governing the determination of the imputed tax base was described more thoroughly. At the same time, certain intrinsic shortcomings of imputed taxation remained. The compulsory character of the tax as concerns certain types of activities will result in the impossibility to compare the results of taxation of these types of activities under the imputed and general regimes, thus misleading about the correcting coefficient K233. Moreover, the use of such a tax will affect the horizontal equity of the tax system, since the averaging basing on natural indicators results in different taxation of enterprises showing equal results of economic activities. Regional authorities still may arbitrary determine the tax base, since the coefficient K2 may be considerably varied from 0.1 to 1, and regional authorities are responsible of its parameters. At the same time, it may turn out that for certain enterprises there may be determined practically individual tax bases (too high or too low) depending on the preferences of regional authorities and their ties with enterprises. This coefficient may be also used to hinder new enterprises to access markets in the case the authorities have interest in or control over businesses subject to the tax on imputed income operating in the region.
In this relation it seems feasible to apply the tax on imputed income only to especially small enterprises on voluntary basis. The considerable efforts the Government made to determine indicators significant for evaluation of profitability may prove useful for the tax authorities. Basing on the imputed methods it is possible to evaluate the potential amount of tax payments of enterprises and in case of considerable differences between the reported results and the evaluation made by tax authorities set inspection priorities. It would allow to minimize tax evasion, increase budget revenues, and render taxation more fair.
Finally, it seems important to once more refer to the statistics reflecting the role small businesses play in the Russian economy. Goskomstat does not publish the data on added value in the sector of small business. However, the volume of output, number of employed and small businesses may increase not only due to the development of real small enterprises, but also due to increasing tax evasion via small businesses. Even the indicator of added value does not adequately reflect the real situation. It would be feasible to survey only small enterprises not affiliated with large businesses or a large number of other small enterprises in order to monitor the consequences of the new tax procedure.
Appendix 4. Analysis of Certain Results of the Personal Income Taxation Reform Within the framework of the analysis of certain results of the incomes taxation reform in Russia there was made a study of keys problems related to the income tax functioning in Russia and results of the reform made in 200034.
The reform of the income tax or taxes on incomes of natural persons as it is called in the new version of the corresponding part of the Tax Code, was made in 2000 at the first stage of the tax reform and consisted first of all in establishing a flat single rate at a level close to the K2 is the correcting coefficient of base profitability taking into account the totality of other specifics related to business activities, including the range of goods (works, services), seasonal factors, time of work, amount of incomes, and other specifics (see Article 346.27 of the Tax Code).
S. Sinelnikov-Murylyov, S. Batkibekov, P. Kadochnikov, D. Nekipelov “Otzenka Resultatov Reformy Podokhodnogo Naloga” (see http://www.iet.ru).
RUSSIAN ECONOMY in trends and outlooks lowest marginal tax rate of previously effective scale, reduction of tax preferences and simplification of the tax payment and collection procedure. Income tax changes were called forth by the need to enhance its role both in total tax revenues and in tax redistribution processes.
Such a radical income tax reform is being made for the first time in Russia; because of this in contrast to other countries that have already undergone that kind of reforms Russia has practically no experience in studying the changes’ influence on the level of taxable incomes, tax proceeds to the budget and the tax’s role in the process of redistribution of citizens’ incomes.
Among the most important conclusions that follow from the analysis of the situation prior to the reform one can name the following: the income tax played a little role in the tax system due to low average incomes of the population, first of all because of small wages, intricate tax legislation and weak administration of this tax, and as a consequence of this - mass tax evasion, the tax possessed a low redistribution capability, which followed from an abundant use of different mechanisms to evade it predominantly by taxpayers with high incomes.
In such a situation the possibilities to increase tax revenues by using a higher marginal tax rate were limited, as in conditions of poor administration this could lead to a more intensive tax evasion. In those conditions a lower marginal tax rate and a harmonization of the aggregated profit tax rate for enterprises and taxes on wages for employees, alongside with a stronger tax administration according to the fathers of the reform would have promoted a lower concealment of incomes from taxation.
With the aim to form theoretical hypotheses about the reform’s influence on the level of income tax revenues there were used models of tax evasion of Allingham-Sandmo type. Bearing in mind the conclusions made on the basis of such models, we formulated three basic hypotheses. The first one is that a lower marginal tax rate shall entail an increase of the taxable basis. The second one is that a lower evasion, first of all among taxpayers with highest incomes, shall lead to a higher taxation of those, and as a consequence to a higher progressiveness of the income tax. And the third one is that in spite of a lower marginal tax rate there will be higher tax revenues.
We studied the model of relation between changes in tax revenues and in the tax income basis in 2000-2001 and changes of the average marginal tax rate on the basis of data on per capita income tax revenues in different regions in Russia, and models aimed at making an assessment of the degree of progressiveness of the income tax in 2000-2001.
When building a model for income tax revenues as an assessment of the effective incomes of the population including “shadow” incomes, we used the factor of consumer expenses, as far as their changes turned out to be less correlated with changes in the average marginal tax rate than changes in incomes. In the model for the tax basis we also used this factor as an indication for an independent real tax basis increment not connected with changes in the marginal rate. Progressiveness of the income tax was assessed by using three tax revenues models – linear, quadratic and logarithmic. The results of the regression analysis that we acquired allowed us to formulate several basic conclusions.
The first conclusion is that following the hypothesis based on an analysis of theoretical models of tax evasion we managed to reveal a negative association between showings of the taxable basis and marginal tax rate as a result of the incomes taxation reform in Russia in 2000-2001. The second conclusion, as was assumed, taking into account the ineffective income tax rate prior to the reform we revealed a negative association between tax revenues and the marginal income tax rate. The third conclusion was that the results of assessments showed INSTITUTE FOR THE ECONOMY IN TRNSITION http://www.iet.ru that the income tax is progressive with respect to wages and non-progressive with respect to taxable incomes. Besides, judging by the results of panel assessments for the two years we can talk about a higher progressiveness of the income tax with respect to wages in 2001 as compared to the year of 2000. Similar conclusions can also be made from Kakwani and Musgrave progressiveness indices analysis, which reveals an income tax progressiveness growth.
As a corollary we can speak about a higher progressiveness in income taxation of wages when it is not possible with the help of applied methods to reveal a progressiveness of taxable incomes on the whole.
Using the the tax revenues model built up in the course of the research one can define the roles of the actual growth of incomes of the population and of the marginal income tax rate growth with respect to tax revenues. Revenues from the income tax in 2001 as compared to the year of 2000 were higher by 76.4 bln roubles (a 43.9% growth). Model calculations show35 that due to changes in the tax rate (taking into consideration the opposite effects of the rates that were both lower and higher for different categories of taxpayers, and a decrease in tax evasion) revenues from this tax grew by approximately 42 bln roubles, and revenues due to the overall economic growth in the country and a number of other factors grew by 34 bln roubles. The research allowed to formulate a number of practical recommendations to improve the income taxation.
The presence of a positive dependence between changes in the taxable basis and the marginal tax rate gives us ground to hope about a continuation of the tendency to legalise incomes that started in 2001. The basic conditions for it, as we see it, can be first of all keeping the flat income tax rate for a long-term period and, secondly, a higher effectiveness of tax administration including legislative methods to eliminate possibilities to evade paying taxes and to impose heavier penalties for the evasion. The first condition is the key one, as it is quite evident that in the first year of the flat tax rate the evasion decreased to a considerable degree, but did no change itself from a mass phenomenon to a seldom or an exceptional one.
In many respects it is connected with of the taxpayers’ certain distrust to innovations, they still think that after they legalise their incomes the tax rate will be sizeably heightened.
There is an important factor that can add to the effectiveness of the second of the above conditions; it is the fact that when the marginal rate of wage taxation is lowered considerably it shall become much less profitable to use different schemes of tax evasion than sticking to the law, the risks of sanctions for the evasion taken into consideration. A certain potential for reduction of tax evasion lies in the sphere of a stronger administration. In this connection instead of a more strict control of big expenditures on the part of natural persons, which is a rather difficult thing to be effectively administered, it is expedient to establish the required legal instruments to provide the tax authorities with a possibility to make their assessments of taxation basis using so-called “external indications” of wealth.
The presence of a constant (which showed to be not significant) does not allow us to factorise incomes changes with no remainders by two factors: the average marginal income tax rate change and changes in expenditures. For the purpose of analysis of the factors’ influence the equation about correlation between changes in tax revenues and changes in consumers’ expenditures and changes of the average marginal income tax rate was assessed with no constant. It should be noted that such a calculation is bound to be conditional to a certain degree, as far as changes in expenditures are correlated to changes of the average marginal rate (correlation coefficient is 0.24) and coefficients that were acquired in the model can fail to reflect the true correlation between tax revenues changes and changes in expenditures and average marginal tax rate.
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