Determinants of Tax Capacity for a Territory (The Case of the Russian Federal Districts)

In this article, the tax capacity of the territories in the Russian Federation was studied. The study was conducted based on the aggregation for eight federal districts, including data on 85 subjects of the Russian Federation from 2009–2018. To determine the factors that have the strongest impact on tax capacity at the subnational level, an econometric analysis of the panel data was performed using the Stata program. In the development of the model, tax share was used as the resulting indicator. The article analyzes the impact on tax share of 16 macroeconomic indicators that reflect the human and financial potential of taxpayers in a federal district, the investment attractiveness and innovative activity of the territory, as well as global financial and economic regulators. The hypothesis that due to significant differences in the socioeconomic development of territories, the determinants of tax capacity will differ by federal districts, was confirmed. However, it was proved that such differences are not related to the specific features of socioeconomic development inherent in the constituent entities of the Russian Federation. Among the selected factors in pooled regression, fixed effects, and random effects models, the level of employment of the population and the financial results of companies were considered the most significant. The significance of the level of employment of the population could be determined by a clear deficit in gross fixed capital accumulation against the background of a high degree of depreciation of fixed assets and the share of manual labor.

Russian federal districts; Subnational budget; Tax capacity; Tax effort; Tax share

The tax capacity characterizes the ability of the region to generate tax revenues. The assessment of this indicator identifies the potential for increasing tax capacities, although this increase is not always guaranteed. In other words, taxation in the region is not necessarily aimed at achieving a maximum tax capacity. However, the proper assessment of the tax capacity is extremely important for building a tax system that is relevant to the tasks of the state. In the study of a country's tax capacity, a wide range of actions can be undertaken to increase the actual indicators by changing the tax system, taking into account all economic and social implications. However, at the level of subnational budgets, the task becomes more unambiguous (i.e., to identify possible areas for increasing tax revenues with the given parameters of taxation, within the framework of a single tax field). The solution to this problem allows the debugging of the mechanisms of the financial equalization of budgets. Thus, subnational tax capacity is closely related to budget capacity (Pechenskaya, 2018).

Although tax capacity is assessed to forecast the potential tax revenues of budgets, actual data on tax revenues is used to calculate its determinants. After finding the relationship between tax revenues and their determinants, it is possible to search for influential factors to increase the tax effort.

The results of the study confirmed both hypotheses: (1) the tax capacity of federal districts is determined by the main macroeconomic indicators that affect the size of the tax base of budget-generating taxes; (2) the determinants of tax capacity differ significantly across federal districts. Thus, these results are consistent with those from previous studies.

In future research, the indicators for federal districts that reflect the digital transformation both in terms of tax administration and the performance of taxpayers' obligations to the state will be included in the modelling process. However, from a practical standpoint, it is promising to uncover the tax capacity determinants for individual constituent entities of the Russian Federation. As our work has shown, it may be appropriate to analyze the constituent entities of the federation by clusters united by similar socioeconomic characteristics. This will make it possible to build inter-budgetary relations in the most effective way, solve problems of regional subsidies, and contribute to the sustainable development of territories.

This research work was supported by the Academic Excellence Project 5-100 proposed by Peter the Great St. Petersburg Polytechnic University.

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