Fiscal Effects of Labour Income Tax Changes in Russia

S G Belev,N S Moguchev,K V Vekerle

doi:10.15826/jtr.2020.6.3.082

Abstract

The purpose of this article is to evaluate the fiscal effects of changes in social contribution rates in Russia for the period 2010–2014, which was marked by significant changes in tax legislation. The consequences of these changes for both the budget system and the labor market still have not been thoroughly studied. As the empirical and theoretical research shows, taxation could influence the labor market in two ways: through the intensive and extensive margin. This study tests the hypothesis about the two kinds of effects of taxation for Russia by using the data of the Russian Longitudinal Monitoring Survey. It is demonstrated that an increase in the social contribution rate causes a decline in labor participation both for women and men. Moreover, an increase in the social contribution rate causes a reduction in the net-of-tax wage level for women and men. The state has already exhausted the opportunities for raising social contributions and pushing the reforms further would mean jeopardizing budget revenues and fiscal sustainability. Generally, an increase in social contributions has had a negative impact on the government’s revenues from social contributions and the personal income tax. It can be concluded that in general, the fiscal effects of the reforms were negative rather than positive. We would recommend the government to reconsider the current social contribution rates. Since the labour market is highly sensitive, it is possible to raise tax revenue through other means, thus avoiding adverse effects on public welfare.

Highlights

Economists and policymakers have long been interested in understanding the effects of economic incentives on the retirement decisions of older workers
Our results suggest that taxes have a statistically significant and economically large impact on labor force participation and retirement decisions for older workers
We find significant effects on the retirement margin. 53% of the extensive margin effect for women is associated with retirement while 36% of the participation effect for men is associated with retirement

Summary

Introduction

Economists and policymakers have long been interested in understanding the effects of economic incentives on the retirement decisions of older workers. Due to the potential benefits of systematic delays in retirement, there are large literatures investigating the labor consequences of Social Security benefits (see Feldstein and Liebman (2002) for a review), pensions (e.g., Samwick (1998); French and Jones (2012)), and Medicare (e.g., Blau and Gilleskie (2006); French and Jones (2011)). Income taxes affect individuals’ incentives to work and, as such, the tax code is a potentially useful, but generally overlooked, policy lever to encourage individuals to earn more and remain in the labor force longer. Some have suggested scope for more agetargeted tax policy. Banks and Diamond (2010) in the Mirrlees Review recommend increasing the age dependence of taxes, calling the idea “a case of theory being ahead of policy, with research on tax design needed.” some economists have recommended eliminating the payroll tax after certain ages or after Social Security receipt (Biggs (2012); Laitner and Silverman (2012)), and the elimination of income taxes for seniors earning less than

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Conclusion