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Section 5. Economic theory
Ramishvili Varlam, Doctor of Economics, Professor of Georgian Technical University, Tbilisi, Georgia
E-mail: v.ramishvili@gemail.com Baratashvili Evgeni, Doctor of Economics, Professor of Georgian Technical University, Tbilisi, Georgia
E-mail: barata49@mail.ru Lagvilava Tamar,
Doctor of Business Administration, professor-assistant of Georgian Technical University, Tbilisi, Georgia E-mail: t.lagvilava@gmail.com
INFLUENCE OF LAFFER CURVE IN STATE GOVERNMENTS OF DEVELOPING COUNTRIES
Abstract: In connection with a significant differentiation of regions, the task of establishing the optimal tax burden is of particular relevance. The article analyzes the tax burden and its impact on the economic stability of the regions during the financial crisis. An assessment of the tax burden. The conclusion is made about the need for an individual approach in the tax policy pursued in the region, depending on its socio-economic development.
Keywords: taxation, tax policy, Laffer curve, socio-economic development of regions, tax burden, economic sustainability.
The withdrawal by the state in favor of society of a certain part of the gross domestic product in the form of obligatory deductions constitutes the essence of the tax, as A. Smith pointed out in his classic essay "Studies on the nature and causes of the wealth of nations". It is noted that the main function of taxes is not only the fiscal function, aimed at the formation of monetary expenditures of the state, but also regulating. Taxes, affecting economic processes, have a corresponding stimulating or inhibiting effect in various spheres of social activity.
These functions are interdependent, since the implementation of the fiscal function forms the material basis for the development of socio-economic relations, investment in selected sectors of the economy, etc. At the same time, the positive dynamics of macroeconomic indicators creates conditions for increasing tax revenues to all levels of the budget.
To determine the amount of the required tax burden is quite difficult. An optimal balance should be achieved between two mutually-directed processes: on the one hand, the interests of the state interested in maximizing tax flows, and on the other, the desire
of entrepreneurs pursuing the goal of reducing the tax component in their business.
This problem is becoming more acute and acquires a special urgency due to the fact that at present there is a great differentiation of regions according to economic, social, demographic, natural resource and many other features. Statistics show large differences in the standard ofliving of the population, even between neighboring regions. Some regions of the country are subsidized, while others can become "engines" of economic development, able to carry along certain sectors of the national economy complex. All this leads to the conclusion about the need for an individual approach to the practice of tax administration conducted in the region, taking into account all the features and nuances of their development.
The classical definition of the tax burden as a value indicating the share of taxes in GDP does not fully reflect the actual tax burden on the country's economy, given the scale of tax evasion.
In addition, the level of tax burden should correspond to the level of development of the tax and industrial potentials of the region and take into account all aspects of the socio-economic sphere. Since, there is a large differentiation of regions, according to the degree of economic development, the greatest interest is not an abstract static parameter
determining the magnitude of the tax burden, but an assessment of the effectiveness of all tax policy in the region, taking into account the dynamics of its industrial development and the level of tax revenues over a certain period of time.
The most accurate way to solve this problem is the method based on the calculation of efficiency parameters within the framework of A. Laffer's concept, according to which the dependence of the amount of tax revenues on the level of tax burden is described by a parabola with a maximum point. It is understood that there are two Laffer curves: production and fiscal. Each of them has its own maximum point, the excess ofwhich leads to stagnation of economic development or reduction of tax revenues. In addition, there is a shift of the vertices of the two parabolas so that the maximum point of the fiscal curve along the abscissa axis shifts relative to the maximum point of the production curve.
Thus, even with the beginning of a downturn in economic activity for a limited time period, it is still possible to receive a sufficient amount of tax collections. In this case, it is indicated that there are Laffer points of the 1st and 2nd kind: 0 * and 0 **, which are maximum points and at which at a certain level of tax burden there are depressions in the regional economy and a decrease in tax revenues (Figure 1).
Figure 1.
Mathematically, these points are calculated by differentiating the corresponding curves and are determined when the tangent is parallel to the abscissa axis, i.e., the tangent of the angle a is zero.
The Laffer points on the production and fiscal curve, thus, the conditions for the Laffer points of the 1st kind are fulfilled:
dx (e *)/de = 0; d2x (e *)/de2 < 0,
where X is the volume of production; 0 * is the Laffer point of the 1st kind; 0 is the tax burden.
For points of Laffer of the 2-nd kind:
dT (e **)/de = 0; d2T (e **)/de2 < 0,
where T is the amount of tax revenue; 0 ** is the Laffer point of the 2nd kind; 0 is the tax burden.
The level of the existing tax burden 0 is calculated in the usual way and is defined as the share of tax revenues in GDP.
World practice shows the significance of tax revenues for the country's development. Taxes represent the main source of income of the state budget, the more budget revenue, the easier it is for the state to solve economic and political problems. Tax revenues are entirely dependent on the tax burden. The increase in the tax rate leads to an increase of income until it reaches optimal size and then it starts to go down. Graphically this dependence is well reflected in the Laffer curve.
Figure 2.
Famous American scientist A. Laffer reflects the dependence of tax rates on tax revenues by the example of his country. The United States represent
a classic example of a market economy, where economic potential of the country is mastered or fully mastered. The tax systems of developed countries (Denmark, France, UK, US) show that their tax burden is higher than in developing countries. Optimal maximum point on the Laffer curve, on the one hand, will give us the highest financial results and, on the other hand, prevents the development of a quasi-market and monopolies, which in turn will cause the development of full competition in the market economy.
Although this judgment can be applied only to developed countries, as it does not address the economic problems of developing countries (social, undeveloped markets, etc.). What is optimal for developed countries, it will be impossible for developing countries. We think in order to reach the optimal point, we have to put on this chart the indicator of deviations from the economic potential that the chart will be as follows.
Ql Qd 100%
Figure 3.
Point A indicates the optimum point of tax revenue in developed countries, that is higher, fiscal record, when its economic development is economic potential or close to it. Point B - the optimal point of tax revenue in developing countries; and the plane -a measure of deviation from economic potential. It inhibits the possibility of reaching the optimum point from point Bto point A, that is, the movement
from the point Q1 to the point QO does not give us moving from point A to point B, accordingly, tax revenues will not be able to move from point S1 to point S2, i.e., S1 is an optimal point of tax revenues of developing countries. The further economic development of the countries used from the economic potential, plane and more to shift to the left, and contrariwise, when the economic development of the country close to economic potential, the plane would be close to the point A.
In the assessment of taxation of developing countries with the help of the Laffer curve, there are two problems:
1. If the tax burden is less than the optimum tax revenue (point B), then tax revenues will be smaller (point C). The quasi-market will develop, as in tax benefits the market is not fully competitive, such as in Georgia.
2. If in developing countries, such as Russia, the tax burden is more than the optimal tax revenue (point B), then the income will be lower (point D):
Qi Qi Qo
Figure 4.
Figure 5.
Thus, the application of the Laffer curve, representing the model of optimization of tax revenues, is justified only in relation to developed countries, and the point that is optimal for developed countries, may not be optimal for developing countries, because untapped economic potential will prevent this. Its supreme fiscal point will be at the point of intersection of the plane of deviation from the economic potential and the Laffer curve.
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