Economic Growth and Optimal Tax Burden: A Case of Uzbekistan’s Economy

Abstract

Taxes have always been the largest contributor to the government budget revenue, so it is critical to collect maximum amount of tax revenue to meet policy objectives. The revenue performance of the countries, in turn, depends primarily on optimality of tax burden in an economy and capacity of revenue agencies to levy taxes set by the law. These factors have been major issues for all countries around the world, particularly for transition economies which are on the verge of major economic transformation. Uzbekistan as one of such countries, since 2017 has implemented multiple fiscal reforms to improve the fiscal capacity of the tax system, thereby increasing economic growth. To assess to what extend current tax policies are efficient, we put forward aim of the article as to elaborate the efficiency of Uzbekistan’s tax system using tax effort index to measure collection capability of potential tax revenue and optimal tax burden to maximize economic growth. In this study, we first using mathematical model identified tax effort index for Uzbekistan, which appeared to be approximately 45%. This implies that revenue agencies of Uzbekistan failed to collect on average half of the potential tax revenue over the period 2010–2020. Furthermore, we attempted to determine the optimal tax burden using the Ordinary Least Squares (OLS) method. According to the results of the econometric analysis, the optimal level of tax burden in Uzbekistan for the years 2000–2019 is estimated to be around 19%. Targeting tax burden to this level could reduce GDP gap by 1%.