Tax Stimulation of Economic Growth in Russia: Problems and Prospects

Gurnak Aleksandr Vladimirovich ORCID: 0000-0002-4514-6885 PhD in Economics Associate Professor, Leading Researcher, Department of Taxes and Tax Administration, Financial University under the Government of the Russian Federation 125167, Russia, Moscow, 49/2 Leningradsky Ave. AVGurnak@fa.ru

Nazarova Natal'ya Aleksandrovna PhD in Economics Associate Professor, Leading Researcher, Department of Taxes and Tax Administration, Financial University under the Government of the Russian Federation 125167, Russia, Moscow, 49/2 Leningradsky Ave. nanazarova@fa.ru

     The problem of stimulating economic growth in the Russian Federation, as a necessary condition for socio-economic development, has been of priority importance for several decades. It is often emphasized in the annual messages of the President of the Russian Federation V. V. Putin to the Federal Assembly, including since the first 2000. At the same time, the need for sustainable growth, its causes and vulnerability to external factors is emphasized. In 2003, the head of state set the task of doubling the GDP. Today, ensuring economic growth in Russia above the global average by 2030 while maintaining macroeconomic stability is defined as one of the indicators of achieving the national goal of "Decent, effective work and successful entrepreneurship" ^[1].

     At the same time, as shown in Fig. 1, the indicators of economic growth in modern Russia are very unstable, for many years it has not been possible to achieve the target values. At the same time, there is a noticeable significant lag from the similar indicator of the economies of India and China, which are already in the desired range for the Russian economy and indicate the reality of achieving the stated strategic targets.

 Fig. 1. Comparative dynamics of economic growth indicators in 2010-2021.Source: built by the authors according to the World Bank ^[2]

The last decade has turned out to be very difficult for Russia due to the fact that the country has faced the most serious challenges, including the need to update production processes based on the technologies of the Fourth Industrial Revolution, the pandemic of a new coronavirus infection, the most complex geopolitical crisis and unprecedented economic sanctions. Of course, all this could not but affect economic growth. However, today it is already obvious that the series of exogenous shocks that have occurred has determined new conditions for the development of Russia, which require and make possible the adoption of cardinal decisions in a variety of areas, including in the practice of tax incentives for economic growth.

     The scientific justification of tax incentives for economic growth comes from the operational provisions of economic theory in the relevant subject area, verified (at least partially) through empirical research ^[3-5]. The approach to the study of the impact of taxes on economic growth associated with its exogenous and endogenous theories has become widespread in the financial mainstream ^{[3, 6]}. The theory of exogenous economic growth, developed back in the 1950s and 1960s ^[7], considers it as a result of capital accumulation, and an increase in labor productivity – technological progress. Usually the emphasis is on capital accumulation, and as for technological progress, it is assumed that it is due to some external – exogenous – variables. Exogenous growth models are based on the production function, where capital and labor are factors, which can be objects of taxation. One of the important conclusions for the policy of tax stimulation of economic growth, justified on the basis of the theory of exogenous economic growth, was the conclusion of K. Chamley that in the long term the optimal tax on capital income should be zero ^{[8, p. 619]}.

     Unlike growth that depends on external factors, the theory of endogenous growth proceeds from the fact that it is generated within the economic system itself as a direct result of its internal processes. At the same time, a number of explanations for economic growth are proposed, such as increasing human capital, better provision of public goods (through investments in education, healthcare, infrastructure, research and development), search by economic entities for profitable investments, etc. It is obvious that tax policy can influence all these processes and, consequently, economic growth. One of the latest studies on tax policy in the context of endogenous growth driven by innovation was carried out by T. Gross and P. Klein (2022), who proved that in the short term capital can be taxed, but in the long term it should be subsidized, and the question of whether taxes on innovation should be positive or negative, depending on the amount of government spending, the strength of the external effects of innovation and the market power of patent holders ^[9].

     The contribution of Russian scientists to the analysis of the problems of tax incentives for economic growth is also significant. In particular, E. Balatsky in a number of scientific papers developed A. Laffer's concept of the impact of the general level of taxation on production and budget revenues ^{[10, p. 34]}; a researcher together with N. Ekimova constructed dependences of the growth rates of the production of branches of the Russian economy on the level of the industry tax burden and made an important conclusion that the sensitivity to the tax burden depends on the level of technology of the industry ^[11]. In the works of V. G. Panskov, the tax policy implemented in the Russian Federation is analyzed, a conclusion is made about sufficient consistency and a certain unsystematic nature, which led to the formation of an inflated level of tax burden that hinders the growth of investments ^[12]. V. G. Panskov also shows that the current instruments of tax regulation are not able to facilitate the attraction of funds by business entities for their M. D. Abramov and V. A. Kashin systematically investigated the impact of taxation on the processes of socio-economic development in Russia, and came to the disappointing conclusion that "taxes are against development" ^[14]. At the same time, it should be noted that a number of tax barriers to economic development, including the inefficiency of VAT tax administration, high labor costs for preparing tax reports, are successfully removed during the digitalization of relevant processes by tax authorities, while the proposals of specialists regarding progressive taxation of personal income as the most important condition for socio-economic development are not new and are very debatable nature. The comprehensive approach and completeness of the study distinguishes the work ^[15], in which the whole set of tax instruments available at the regional level to stimulate the investment activity of economic entities is analyzed, their comparison with progressive foreign experience is carried out.

     The purpose of this work is to study the aspects of tax incentives for economic growth in Russia in connection with the new industrial revolution and the digitalization of the economy and to identify its promising areas.

     The formation and development of the modern Russian tax system took place in the conditions of orientation to the Western European model of economic construction, which, in the conditions of the then boundless optimism about pro-Western globalization, was considered as the only true, in fact, universal.  At the same time, the tax mainstream, striving for the widest coverage of the most diverse processes and phenomena, was usually based on explicit or implicit assumptions about the uniformity of people's behavior (their universal rationality or limited rationality, regardless of direct dependence on technological, cultural, institutional factors) and the societies they created, and therefore usually did not take into account the specific circumstances of the place and time.

     The consequence of this is that Russian legislation today reflects in one way or another all the main tax instruments for stimulating economic growth that are used in practice in most countries of the world. Most of these instruments are associated with benefits and preferences for corporate income tax, and the tax instruments themselves are designed to stimulate the activation of investment and innovation activities of organizations, including:

- nonlinear (accelerated) depreciation;

- increasing coefficients to depreciation rates;

- "depreciation premium", which allows you to allocate from 10 to 30% of the cost of purchased fixed assets and/or their completion, reconstruction, modernization to expenses;

- increasing ratio to R&D expenses;

- investment tax deduction for corporate income tax;

- investment tax credit and others.

     Reduced or zero corporate income tax rates are applied by residents of special economic zones (SEZ), territories of advanced socio-economic development (TOCER), participants of free economic zones (SEZ), the Skolkovo Innovation Center, regional investment contracts (RIP), special investment contracts (SPIC) and other separate categories of organizations.

     Of course, tax benefits aimed at stimulating economic growth are also applied to other taxes (for example, an investment tax deduction for personal income tax, a set of preferential conditions for property taxes for SEZ residents, VAT exemption for R&D performed at the expense of the budget, and performed by scientific and educational organizations, etc.), However, the greatest result is stillthe same was expected from the benefits of corporate income tax. At the same time, as the analysis shows, neither business nor the state are quite satisfied with the available tools.

     For business, the application of tax benefits is often considered as quite costly (for example, in connection with the registration of various documents required to qualify for benefits) and risky actions. Thus, experts note that "regarding the legality of the application of tax benefits, there are a huge number of disputes, which are most often associated with a different understanding of the purposes of their establishment, the rules for their use, as well as the authority to put benefits into effect" ^{[15, p. 182]}. Profit tax benefits are meaningless when, for example, at the initial stage an organization does not yet have a profit, but there is a need to make capital investments and an obligation to pay other taxes. communication of authors with business representatives. In addition, in the communication of the authors with business representatives, the message from the latter quite often sounds that the corporate income tax can be effectively planned and quite legally optimized, and therefore it does not form the main tax burden.

     On the part of the state, the key issue related to the provision of tax benefits related to stimulating economic growth is expected to be the issue of their effectiveness. The Accounts Chamber of the Russian Federation has repeatedly drawn attention to the ineffectiveness of certain benefits, and its report published in early 2020 indicates that the zones created in the country with preferential tax regimes have still not had a "breakthrough impact" ^[16].

     It should be noted that the executive power was also very concerned about the assessment of the effectiveness of tax, including investment benefits, and carried out systematic work in this regard, including those related to methodological recommendations for assessing the effectiveness of tax expenditures, which should be carried out by curators of tax expenditures ^{[17, 18]}. At the same time, the effectiveness of such activities still remained low. Significant, and in our opinion reasonable, hopes in solving this problem are pinned on the joint development of the Ministry of Finance and the Federal Tax Service of Russia presented in the fall of 2022 - the analytical system "Efficiency of benefits" ^[19]. Since the new system is built on the basis of AIS "Tax-3", this means that it will use the most up-to-date and accurate information about each taxpayer applying a particular tax benefit. In fact, this tool will be able, as in the case of VAT administration reform, to maximize the benefits of the possibilities of using modern information technologies, processing and analysis of big data.  An investment tax benefit is recognized as effective if the taxpayer who applies it achieves an increase in operational profitability and return on assets, and at the same time, the most important point is that this taxpayer increases investments, R&D volumes, and the wage fund. Otherwise, the benefit is considered ineffective. If the inefficient use of benefits is recorded by more than 70% of all taxpayers, then the benefit needs to be adjusted. As noted by Deputy Finance Minister A.Sazanov, the results of the work of the new analytical system "Efficiency of benefits" showed that additional adjustment is necessary for 12 preferential regimes, verified by the Ministry of Finance, operating in the Russian Federation, related to the application of investment tax benefits (including SEZ, SPIC, investment tax deduction for corporate income tax, etc.). Official He designated 2024 as the period when additional adjustment measures should be implemented in the tax legislation. 

     The government is also not entirely satisfied with the sectoral distribution of benefits from investment tax benefits. Thus, with a general assessment of the corresponding tax expenditures at the level of 2.4 trillion rubles, the lion's share - 83.3% (about 2 trillion rubles) falls on the oil and gas sector, and the remaining 16.7% (400 billion rubles) is mainly used by the largest companies in traditional sectors of the Russian economy ^[20].

     Thus, the problem of inefficiency of investment tax benefits currently in force in Russia is, in fact, explicitly recognized by the state authorities, which means that well-thought-out, systematic recommendations are needed to solve it.

     In this context, first of all, it is important to emphasize that, firstly, tax incentives for economic growth should be carried out in accordance with the requirements of the Strategy of Scientific and Technological Development of the Russian Federation ^[21], which is aimed at obtaining high scientific and scientific and technical results and creating technologies that are the basis for the innovative development of the domestic market of products and services, as well as Russia's stable position in the foreign market, including advanced digital and intelligent technologies, robotic systems, new materials, clean energy technologies, highly productive and environmentally friendly agro- and aquatic farming, etc. – that is, everything that reflects the essence of the Fourth Industrial Revolution, which Russia should enter as one of the world leaders in selected areas of scientific and technological development within both traditional and new markets of technologies, products and services.

     And, secondly, tax incentives for economic growth should not contradict the strategic orientation to maintain macroeconomic stability in the Russian Federation, which is of priority importance from the standpoint of national security. In this regard, the fiscal system has a certain potential and room for maneuver, since in recent years it has generally been distinguished by a high level of balance and a low level of debt denominated mainly in national currency ^{[22, p. 21]}, and, in addition, further improvement of tax collection by digital tax administration methods, etc.

     Today it is important to properly use this potential, based on the understanding that the previous model of economic development of the Russian Federation, based on the export of hydrocarbons, the exploitation of cheap resources, including labor, and the import of finished products, has clearly exhausted itself ^[23]. Therefore, it is necessary, using the new "windows of opportunity" that the Fourth Industrial Revolution opens, to form a long-term, stable, transparent for business and society proactive tax policy aimed at solving a set of interrelated tasks: with a general course to create a generally favorable tax regime for business, primarily the sector of small and medium-sized enterprises, necessary for the normal functioning of a complete ecosystem of economic entities, the growth of employment and the welfare of citizens, to provide systematic support for production technologies that are key to national security and economic growth, while shifting reformist accents to aspects of digitalization.

     The profit of organizations in modern conditions is losing its importance both as a regulator of economic processes and as an object of taxation.

     Firstly, because purely market regulators – and profit is the central link of market regulation – are losing their importance due to the beginning of a new industrial revolution. At this initial stage, as is well known, it is necessary to focus more on indicators of technological efficiency, rather than market (economic) efficiency ^[24]. The importance of technological efficiency and technological sovereignty is increasing even more due to the problem of exogenous shocks, which include Western economic sanctions against the Russian Federation. Under these conditions, the market mechanism of industrial policy, which the government has traditionally focused on, does not work reliably enough. As a result, at a critical moment, the country did not have its own equipment and technologies in a number of areas. For example, in the production of building materials, dependence on imported supplies is up to 40%, and in the food and textile industry – up to 60-80%. ^{[25, p. 6]}. Therefore, now at the level of the central government, the transition from a market industrial policy to a policy of ensuring technological sovereignty, where, obviously, the current profit, on the basis of which the tax is calculated, it will not be the main guideline.

     Secondly, because the income tax, in principle, does not work well in the conditions of the dominant trend towards digitalization in the world. At the global level, there are already serious claims to it, since TNCs in the conditions of digitalization get away from this tax relatively easily, which leads to an unfair distribution of wealth and deepening inequality in the world. This became the basis for a decision at the international level to introduce a global minimum tax rate and redistribute part of tax rights between countries depending on the place of origin of income, which is obviously a palliative solution.

     Similar problems arise in the Russian Federation, and not only in relation to TNCs, but also domestic enterprises, which, thanks to digitalization, have objectively received more opportunities to engage in tax planning (as already noted above).

    The problems of corporate profit taxation were clearly manifested in 2022, when unprecedented economic sanctions were imposed against the Russian Federation by the collective West. Figure 2 clearly shows a significant drop in corporate income tax receipts. Compared to the IV quarter of 2021, real corporate income tax receipts decreased in the I-III quarters of 2022 by 14.8%, 26.03% and 56.69%, respectively. At the same time, the reduction of all real tax revenues was determined at the level of 19.92, 27.71 and 45.91%. At the same time, receipts for corporate income tax in the third quarter of 2022 became less than receipts from VAT and personal income tax, and it moved to the third position for the first time in recent years.

 Fig. 2. Dynamics of tax revenues in the budget system of the Russian FederationSource: calculated by the authors according to tax reporting data in the form of 1-NM ^[26], taking into account the values of quarterly GDP deflator indices in 1-3 quarters of 2022 ^[27].  

It should be noted that in world practice, when forming tax policy, special tools are used related to the calculation and analysis of sensitivity indicators (tax buoyancy) and elasticity (tax elasticity) of tax revenues both in general and for certain types of taxes ^[28]. At the same time, for certain reasons, the sensitivity indicator has been more widely used, which is calculated according to the formula:

where LF _i is the sensitivity for tax revenues for the i-th type of taxes;

%? Tax receipts - percentage change in tax provisions for the i-th type of taxes;

%? of GDP is the percentage change in GDP.

     Tax sensitivity shows by how many percent tax revenues increase/decrease with an increase/decrease in GDP by one percent. It is important that the growth of tax indicators with this method of calculating the indicator is not solely related to GDP growth, but is determined by the totality of relevant factors (including, for example, changes in tax rates, tax administration efficiency, exogenous shocks, etc.). The results of the calculations are presented in the table.  It can be seen that gradually tax revenues are becoming less sensitive to the reduction of GDP. In general, the same dynamics characterizes the sensitivity of tax revenues from income tax.  

Table 1 - Tax sensitivity for the aggregate of tax revenues and individual types of taxes I quarter 2022

Source: calculated by the authors based on tax reporting data in the form of 1-NM ^[26] and quarterly GDP indicators, taking into account the values of quarterly GDP deflator indices in 1-3 quarters of 2022 ^[27].        

However, the sensitivity of corporate income tax to a decrease in GDP in the third quarter of 2022, when the tax system has already adapted to the conditions formed as a result of the start of a special military operation, is almost twice as high as the sensitivity of the entire set of tax revenues to the budget system of the Russian Federation and is an order of magnitude higher than the sensitivity of VAT and personal income tax receipts.  Of course, this is a preliminary conclusion that requires additional empirical verification based on data from future periods. It seems that the tax incentives for economic growth embedded in the current mechanism of corporate income tax during the crisis and recession are losing their significance for many taxpayers, since the tax itself is not paid or is paid in relatively small amounts due to the reduction of the tax base.     

All of the above allows the authors to propose the following conceptual solution for the Russian tax system – the transition from incentives through the mechanism of taxation of profits of organizations (bearing in mind that the benefits of this tax do not work well as an economic incentive) to tax incentives that encourage investment and innovation through other, more reliable mechanisms in the conditions of digitalization. This implies:

1) the rejection of corporate income tax in favor of an alternative that lends itself well to digital algorithmization (does not require special accounting and always controversial comparison of numerous and diverse elements of gross costs and results for the reporting period), does not burden investments, i.e. resources introduced into the business, and taxes only resources derived from business;

2) the creation of a new, transparent and understandable for business entities digital mechanism of tax incentives for economic growth in the form of tax credits, provided they meet the qualification requirements in terms of R&D and investment. A fundamentally new and important point of the proposed tax instrument should be that the digital tax investment and innovation loan is the allocation of digital rubles to the accounts of economic entities that can use them to repay tax obligations of their choice for any of the taxes accrued to them.

     The Bank of Russia is actively working on the widespread use of digital rubles at the moment. Their indisputable advantage is the possibility of their "colored" application. Therefore, the provision of a digital tax credit is, on the one hand, a potential opportunity for effective control over the targeted nature of the use of digital money using blockchain technology. And, on the other hand, it is an increase in the degrees of freedom of economic entities in terms of the use of resources allocated by the state.

     It should also be noted that economic entities are objectively very different and react differently to tax incentives. Therefore, an effective system of tax incentives should also be differentiated.

     Economic coordination in the modern world has at least two forms: market coordination, which operates mainly in the sphere of small and medium-sized businesses, and hierarchical coordination, which is common for large businesses and large corporations, primarily state-owned ones. These are different ways of economic existence and different behavioral (including tax) patterns, which were written about by J. K. Galbraith (market and planning systems) ^[29]. For example, the main means of communication in the mechanism of market coordination are prices, and in the hierarchical one – routines ^[30].

     Therefore, for medium and small businesses, tax incentives are more important, which reduce market prices for consumed and invested resources for them, and for large businesses – institutional stability and the ability to control the environment, which is achieved, among other things, through lobbying and special contracts with the state (SPIC, NWPC).

Conclusions. Solving the urgent problem of tax incentives for economic growth in Russia in the context of the Fourth Industrial Revolution requires the formation of a new fiscal environment corresponding to the new digital realities, which encourages savings, investment and innovation, labor and entrepreneurial activity in accordance with the priorities defined by the Strategy of Scientific and Technological Development of the Russian Federation. At the same time, the set of proposed measures should not contradict the policy of maintaining macroeconomic stability, which is of fundamental importance from the standpoint of national security.

     This requires the formation of a long-term, stable, transparent for business and society proactive (proactive) tax policy. It should be aimed at solving a complex of interrelated tasks: with a general course to create a generally favorable tax regime for business, primarily the SME sector, necessary for the normal functioning of a complete ecosystem of economic entities, employment growth and welfare of citizens, to provide systematic support for production technologies key to national security and economic growth with a shift in reform emphasis on aspects of digitalization.

     Digitalization creates not only new opportunities, in particular in the field of tax administration, which has already made it possible to fundamentally improve the mechanism of VAT collection, but also new problems that call into question the potential of the traditional corporate income tax, which has already been clearly manifested in the conditions of economic sanctions.

     Therefore, it is important to once again consider the issue of abandoning the current corporate income tax in favor of switching to a new form of this tax, which lends itself well to digital algorithmization, does not burden investments, i.e. resources introduced into business, but only taxes resources withdrawn from business.  The tax on withdrawn capital and the tax on cash flows at the destination can be considered as candidates.

   It may also be important to develop special tax incentive mechanisms, which, due to their purposefulness and selectivity, can be effective in solving the problem of accelerating economic growth. This is, in particular, due to the peculiarities of the current stage of development – the emergence of new technologies of the Fourth Industrial Revolution based on the achievements of digitalization and the Internet, the successful promotion and dissemination of which in the Russian economy requires special support. In this regard, in addition to the further development of the SPIC and NWPC mechanisms, it is important to provide economic entities with new, more advanced tax incentives for the development of production based on the use of the potential of the digital ruble, the targeted use of which is guaranteed by blockchain technology. But this issue requires further in-depth research, including in connection with the expected transformations of the entire mechanism of financing the Russian economy in the new geopolitical conditions.