Tax instruments in the system of factors of the state's impact on inequality

Introduction

Poverty and inequality in Russia are among the main socio-economic problems. Given the increasing risks of global geo-economic uncertainty and geopolitical tension, these internal problems for Russia will require even more attention, taking into account both the reduction of resources to overcome them and social reactions. The President of the Russian Federation has placed the need to overcome inequality and poverty in the rank of national priorities, which is fixed by Decree of the President of the Russian Federation No. 474 dated 21.07.2020 "On National Development Goals of the Russian Federation for the period up to 2030", as well as by the President's Message to the Federal Assembly dated 21.04.2021 ^{[1, 2]}. In October 2021 At a meeting with deputies of the State Duma, the President again stressed: "our main enemy, a threat to stable development, to the demographic future is the low incomes of our citizens, millions of our people" ^[3]. On March 16, 2022, the President at a meeting on socio–economic support of the subjects of the Russian Federation emphasized: "even in in the current difficult situation at the end of the year, we need to achieve a reduction in poverty and inequality." ^[4] The Russian Security Council also considers these problems to be key among the current socio-economic problems of Russia. ^[5]

The problems of inequality and poverty are acute in many countries of the world today. It is no coincidence that reducing inequality both between and within countries is one of the 17 Sustainable Development Goals until 2030, enshrined by the UN General Assembly. ^[6]

Thus, overcoming monetary inequality and poverty of citizens today become conditions for ensuring national security for Russia and sustainable development throughout the world.

Inequality as a socio-economic category

Inequality in society, extremely generalizing, manifests itself in its division. Social inequality is considered today as a specific form of social stratification, in which individuals, social groups, strata or classes are at different levels of the vertical social hierarchy and have unequal opportunities to meet their material, social or spiritual needs ^{[7, p. 127]}.

Today, inequality is becoming multidimensional, finds new manifestations, for example, in inequality of access to quality food, healthcare, education, digital resources and technologies, etc. It covers the quality of various components of human life - household, professional, cultural, etc. However, income inequality, the difference in income level for social groups or individuals remains the determining factor for these manifestations of inequality. Income inequality is often identified with economic or monetary inequality. In our opinion, this is not quite correct. It is required to distinguish between these definitions. Economic inequality is inequality in the level of well–being of citizens as a whole. It includes both income inequality (or, more precisely, current income), inequality of citizens in terms of accumulated capital or wealth, and inequality of consumption. Inequality in accumulated capital is monetary inequality.

The category of poverty is inextricably linked with the category of inequality. From an economic point of view, poverty is characterized by a lack of resources to meet the minimum needs of citizens. Poverty is also a serious and urgent socio-economic problem for Russia. A high level of poverty will also be associated with a high level of inequality. Reducing inequality and poverty are interrelated tasks, because in order to reduce inequality, it is necessary to increase the income level of the least well–off citizens, that is, to reduce the level of poverty. The issues of defining poverty and changing approaches to assessing the level of poverty require a separate study, so they remain outside the brackets of this article.

The issues of assessing inequality and exploring the possibilities of overcoming it have been facing scientists for several centuries. Let's consider some approaches to the study of inequality, as well as the definition of the levers of the state's influence on inequality, reflected in the works of economists and sociologists of the XX-XXI century.

Research overview

In the XX century, the Nobel laureate S. Kuznets achieved success in the study of inequality. He proved on empirical data that industrialization initially led to significant economic growth, accompanied by an increase in inequality until about the 1920s, and then the degree of inequality began to decrease with continued economic growth. Such changes in inequality are characteristic of any society that has embarked on the path of industrial economic growth, and the decrease in inequality is accompanied by a significant increase in real incomes of the population ^[8].

The growing inequality in many countries and the inclusion of overcoming inequality in the UN Sustainable Development Goals until 2030 ^[6] attracted the attention of many scientists to the study of relevant problems.

The graphical expression of the dependence of wealth and inequality is a parabola with branches down or an inverted U-shaped curve, called the Kuznets curve. Subsequently, using broader statistical material, T. Piketty showed that this graph is a horizontal S-shaped curve, since since the 1970s the curve has sharply gone up, the growth of inequality has resumed with the growth of well-being ^[9].

Nobel laureate Joseph Stiglitz in his fundamental research proves that inequality is inherent in a market economy, having arisen once, it is self-producing, and state regulation is necessary to overcome it ^[10].

Anthony Atkinson argues that the problem lies not only in the growing inequality, but also in the fact that there are no effective solutions to combat poverty today. To reduce inequality, new tools are needed in addition to state support for the poor and taxation. He identifies 5 areas for implementing policies to reduce inequality: technology, employment, social security, capital sharing and taxation. ^[11] This is currently one of the most systematic approaches to determining the factors of the state's impact on inequality.

A team of researchers from the World Inequality Lab concludes that asset growth rates among the poorest half of the world's population ranged from 3% to 4% per year in 1995-2021. Since the growth of the assets of this group started from very low levels, the absolute levels of growth in this case remained very low. The poorest half of the world's population accounted for only 2.3% of the total increase in assets since 1996. 1% of people with the highest income received income with a high growth rate (3-9% per year). This group received 38% of the total increase in assets during the specified period. ^[12] Researchers believe that it is necessary to increase the progressiveness of taxation, the formation of a global list of assets to counteract tax evasion, as well as investments in education, healthcare and ensuring transparency of the labor market.  

The subject of research for scientists was various factors of the state's impact on monetary inequality and the identification of potential ways to overcome it. Most often, tax instruments, and in particular, income taxation, are considered as such. So, for example, the results of the study T. Piketty, E. Saez, G. Zucman on the relationship between social stratification and the degree of progressivity of the income tax scale in the United States over 100 years indicate that the growth of inequality in the United States correlates with a decrease in the progressivity of taxes over the past decades. During the period of declining income tax progressivity from 1980 to 2014, the share of after–tax income received by the wealthiest 10% of US citizens increased from 30 to 40%, and before taxes - from 35 to 47% ^{[13, pp. 586-587]}.

Of particular interest to Russia, in our opinion, are studies in countries where a flat income tax scale is used. For example, S. Tanchev comes to the conclusion that there is not a short-term, but a long-term equilibrium between income tax and economic growth. In the long term, progressive income tax in Bulgaria is more compatible with economic growth than proportional. In the short term, there is no statistically significant relationship between progressive or proportional income tax and economic growth. Consequently, a progressive income tax hinders economic growth to a lesser extent than a proportional one ^[14]. Regarding the impact of income taxation on monetary inequality, the author proves with the use of economic and mathematical modeling tools that in Bulgaria the application of proportional income tax leads to an increase in inequality ^[15]. Studies have also been conducted for Eastern European countries proving that proportional income tax increases inequality. Inequality in Slovakia decreased after the return of the progressive scale, in the Czech Republic, the increase in government transfers led to an increase in inequality, and in Romania, a proportional tax also leads to an increase in inequality ^{[16, 17, 18]}.

State social transfers and programs to support the least well-off citizens are also one of the state financial instruments to influence inequality. This is due to the attention of researchers to this tool.

O.S. Sukharev, investigating the role of social policy in overcoming inequality and poverty, comes to the conclusion that the reduction of inequality and poverty "is achieved only in their combination, and not only targeted assistance to the poor, which can be carried out at the expense of additional resources and the diversion of income from the richest part of the population (an additional resource is preferred), but and the introduction of a progressive tax system aimed at solving this problem (diverting the income of the rich)." ^{[19, pp. 29-30]}

L.V. Kostyleva identifies distributive and redistributive state mechanisms of state influence on inequality, noting that it can be overcome in Russia only with the systematic use of these mechanisms. ^{[20, p. 201]}

Taking into account the results of the considered works, we emphasize that the attention of researchers is often attracted by one of the factors of the state's impact on inequality, for example, taxation or state social transfers, and not their entire totality. Thus, the determination of the configuration of the factors of the state's impact on inequality in Russia was not considered as a subject of independent research. The systematization and classification of factors have not been fully worked out. This article is devoted to an attempt to eliminate these gaps.

The level of inequality in Russia

In Russia at present, the problem of inequality is also exacerbated by the poverty of a large number of citizens. According to various estimates, up to 20% of the population are poor. ^[21] The growing global geopolitical and geo-economic turbulence of development repeatedly increases the risks of socio-economic development generated, among other things, by monetary inequality.

Indicators of poverty and inequality in Russia are presented in Table 1.

Table 1 – The level of inequality and poverty in Russia in 1993-2020.

Compiled by the author according to ^{[22, 23, 24]}

The level of inequality in Russia has remained high since the 1990s to the present. This is demonstrated by the dynamics of the Gini coefficient, an indicator of inequality in income distribution. It remains high (0.38-0.43), as estimated by the World Bank ^[22] and Rosstat ^[23]. To assess the dynamics of the poverty level, we used official Rosstat data on the proportion of the population with incomes below the subsistence minimum ^[24]. According to these data, the poverty level in Russia peaked in 1992-1993 and 1999-2001. During these years, 29-31% of the Russian population were below the poverty line. Further, the poverty level decreased to 10.7% in 2012 with a slight increase in 2014-2015 to 13.4%. Since 2015, the poverty level has remained stable – 12-13%, it is not possible to overcome it. In the current situation of socio-economic instability, rising inflation, there will be an increase in the level of poverty. The dynamics of the level of poverty and inequality in Russia is illustrated in Figure 1. The Gini coefficient is represented on the left axis of the ordinates, on the right axis – the proportion of the population with incomes below the subsistence level.

Figure 1 – Dynamics of inequality and poverty levels in Russia in 1993-2020

Compiled by the author according to ^{[22, 23, 24]}

The presented data confirm the consistently high level of inequality in Russia, as well as the high level of poverty, which also does not significantly decrease.

Since the problem of inequality in Russia has become relevant with the beginning of market transformations, it is obvious that they gave rise to it. Inequality is inherent in the market, so it was not possible to avoid it during the transition from an administrative-command economy, of course. At the same time, a number of factors have become aggravating, that is, significantly affecting the degree of inequality. For example, the privatization of state property, the accumulation of capital, key assets, levers of power in the hands of a narrow circle of citizens who have become the most affluent, etc. And this happened against the background of the impoverishment of the general population, whose incomes continued to decline throughout the 1990s, the previously accumulated capital actually zeroed out, which means that well-being fell sharply. During this period, the state could not find effective levers to reduce inequality. 

Characteristics of the factors of the state's impact on inequality

Let's take a closer look at the factors of the state's impact on inequality and their characteristics. The author's version of the classification of these factors is shown in Figure 2.

Figure 2 – Classification of factors affecting the state on inequality

Developed by the author

Financial instruments of the state are key among the factors influencing inequality. They are characterized by a targeted orientation and a rapid effect from the standpoint of the dynamics of the level of inequality. Conditionally, financial instruments are divided into distributive and redistributive. Distributive – these are primary instruments – tax, and redistributive – secondary – state social transfers.

Tax instruments are popular among the factors of the state in influencing inequality. These include measures in the field of income, property and indirect taxation of citizens. The progressive income tax scale is applied in most countries of the world and generally contributes to reducing inequality. Indirect taxation, based on the differences in the consumption structure of the most and least affluent citizens, can be aimed at reducing inequality through the use of differentiated rates – reduced for everyday goods and necessities (Giffen goods, which make up a significant share in the consumer basket of low–income citizens) and increased - for luxury goods (Veblen goods). Property taxes also allow the state to influence the level of inequality through increased taxation of luxury goods, such as expensive real estate and vehicles, as well as through increased taxation of property received as part of inheritance and donation, as well as capital taxation.

Redistributive financial instruments are state social transfers to the least well–off citizens, that is, direct financing. Currently, it is expressed not only in the form of pensions and benefits, but also in various state programs that are aimed at providing targeted assistance to citizens in need. State social transfers reduce inequality by providing assistance to the least well-off citizens, that is, increasing their income level. Using factor analysis, correlation and regression analysis of the relationship between the dynamics of the Gini coefficient and the monetary income of the population, as well as the monetary income of the population minus social benefits, it was found that in Russia today it is social transfers that are the main state instruments for reducing inequality ^{[25, p. 88]}.

Monetary and credit methods of regulating the economy, along with financial ones, significantly affect the level of well-being, poverty and monetary inequality. The main directions here are the regulation of the money supply and the inflation rate. A high level of inflation leads to the depreciation of income, which most acutely affects the well-being of poor citizens. The policy of cheap money stimulates economic growth, leads to a reduction in unemployment, to an increase in incomes of the population.

The regulation of the labor market is also characterized by the impact on monetary inequality. Firstly, it manifests itself when setting the minimum wage. The income level of many of the least well-off citizens depends on this, whose level of remuneration will be determined by this value. Accordingly, in order to reduce inequality, it is necessary not just to index the minimum wage by the level of inflation, but indexation that outstrips the rate of income growth of the most affluent citizens. Secondly, the regulation of employment and unemployment indirectly affects the income level of the least well-off citizens, since their income is mainly determined by the level of wages and social benefits. The higher the employment, the higher the income level of the least well-off citizens. At the same time, the high level of social benefits for unemployment, positively affecting the incomes of citizens, is a disincentive to entering low-paid work.

The general macroeconomic policy of the state and the provision of economic growth also affect the level of inequality. In periods of recession, in general, the level of inequality increases faster than in periods of economic growth.

The systematization of the factors of the state's influence on monetary inequality and their characteristics are presented in Table 2.

Table 2 – The system of factors influencing the state on inequality

Developed by the author

Thus, the modern state has a set of economic instruments to influence inequality.

Tax tools for smoothing inequality

Tax instruments for smoothing inequality are classified by types of taxes on income, indirect and property taxation instruments. In developed OECD countries, they are used comprehensively. In Russia, the potential of tax instruments for smoothing inequality is relatively poorly realized, but nevertheless such instruments are used.

20 years later, from 2021, a progressive personal income tax scale was re-introduced in Russia: 13% and 15%. An increased rate of 15% is set for citizens' incomes of more than 5 million rubles per year. Personal income tax is calculated at this rate as 650 thousand rubles and 15% of income exceeding 5 million rubles per year. At the same time, income from the sale and donation of property, as well as insurance payments, regardless of the amount, continue to be taxed at the rate of 13%. From the point of view of the need to reduce inequality, it is advisable to reconsider maintaining the 13% rate on income from the sale and donation of property. The mechanism of influence on the reduction of inequality of the progressive income tax is to reduce the income of the wealthiest citizens at the expense of its income. The most significant drawback noted by supporters of the flat scale is an increase in the incentive to withdraw the income of the richest from taxation, or "into the shadow", with a progressive scale. The flat income tax scale not only did not contribute to smoothing inequality, but also aggravated it due to the application of the most significant property and investment tax deductions by the most affluent citizens, which led to a decrease in the effective personal income tax rate for them. In fact, the flat scale was regressive in Russia. At the same time, one should not expect that the introduction of soft progression will correct the situation with a high level of inequality. It will be only the first step towards realizing the potential of progressive taxation in reducing the level of monetary inequality in Russia. To significantly reduce inequality, a more complex progression with high rates for the richest citizens is needed, as well as the introduction of a tax-free minimum.

Indirect taxes – VAT and excise taxes – also have a wide potential in reducing inequality in Russia. Currently, a reduced VAT rate of 10% is applied only for certain categories of food and medicines. For most goods and services, the rate is the same and is 20%. In order to realize the potential of indirect taxation in reducing inequality in Russia, it is necessary to strengthen the differentiation of VAT and excise rates based on the consumption structure of the most and least affluent citizens: lower rates for goods that form the basis of the consumer basket of poor citizens, and increase rates for luxury goods. The risk here may be a reduction in consumption due to luxury goods.

Elements of the impact on inequality through property taxation are introduced in the Russian tax system. This is, first of all, an increased coefficient on transport tax for expensive cars worth 3 million rubles and 10 million rubles from 2022, the so-called "luxury tax". The cost from 3 to 10 million rubles was increased in March 2022, taking into account the sharp increase in car prices due to restrictions imposed by Western countries and Japan against Russia. At the same time, there is no independent inheritance and gift tax, capital tax in Russia. These taxes, applied by developed countries, also contribute to reducing inequality.

Thus, only certain elements of the tax impact on the reduction of monetary inequality have been introduced in Russia, the impact potential as a whole remains poorly realized to a certain extent. Taking into account the world experience in reforming the tax system of Russia, as well as the gradual movement towards increasing the impact of taxes on reducing inequality contributes to smoothing inequality and increasing tax fairness.

In order to smooth out monetary inequality at the expense of tax instruments, we consider it necessary:

- increase the progression of personal income tax in terms of excess income and introduce a progression for income from the sale of property;

- establish a non-taxable minimum for personal income tax and link it to the minimum wage (equal or proportional);

- introduce progressive property tax rates;

- to restore an independent inheritance and donation tax in order to redistribute assets accumulated by a narrow circle of citizens within the framework of privatization;

- to strengthen the differentiation of VAT and excise rates based on the consumption structure of the most and least affluent citizens: to lower the rates for goods that form the basis of the consumer basket of poor citizens.

The potential of tax instruments in reducing inequality in Russia must be realized in conjunction with other state mechanisms for overcoming inequality.

Conclusion

Poverty and inequality in Russia are among the key socio-economic problems, the solution of which is designated as a priority at the highest state level. Monetary inequality has not been reduced for 30 years, in fact since the moment of market reforms and privatization of state property, despite the measures taken in this area. The state has a range of economic instruments to influence inequality, which include: financial, monetary, labor market regulation, ensuring economic growth. Financial instruments are currently the most popular and include tax instruments (distributive) and state social transfers (redistributive). In Russia today, social payments to the least well-off citizens have the greatest impact on reducing inequality compared to progressive income tax. The potential of tax instruments for smoothing inequality is very poorly realized. The comprehensive introduction of tax factors for smoothing inequality – in income, indirect, and property taxation of citizens – can have a significant impact on smoothing inequality and will make it possible to achieve a shift in solving the problem of a consistently high level of inequality in Russia since the 1990s.