What can Tax Revenues tell us about the Economic Activity of Regions?

Abstract

(ProQuest: ... denotes formulae omitted.)IntroductionThe economic activities of particular countries or regions can be expressed by different macroeconomic indicators (GDP, unemployment, inflation and balance of trade, or their components). Particular indicators show us the economic health of particular countries or regions which we can use to compare the development of these regions during a selected period.Policy makers use actual economic data for the purpose of economic policy planning and management. However, usually there is a problem with macroeconomic data delay, especially in the case of regional macroeconomic indicators. As there are tax offices on the regional level (represented by regional and organizational units), we can assume that regional policy makers can obtain some up-to-date economic data from these tax offices - for example, regional tax revenues, number of tax returns etc. This tax-based information can serve as an additional source of information for regional management and decision making.The question is: what can regional tax revenues and other tax-based information tell us about the current economic activity of regions? The authors focus on possible relationships among selected indicators of economic activity of regions (GDP, unemployment) and regional tax revenues obtained from taxes imposed on economic activity (VAT, income taxation) and regional tax returns (VAT). The research is provided for the Czech Republic because regional macroeconomic and tax data are available for the authors and the tax system of the Czech Republic has the same features as standard European tax systems. Although our analysis is performed on the regions of the Czech Republic, the methodology can be applied to another European countries.Economic activity taxation in the Czech Republic is based on the following legislation: Act No. 586/1992 Coll., on income taxes (Czech Republic, 1992) and Act No. 235/2004 Coll., on value added tax (Czech Republic, 2004). The trends in particular tax rates development and fiscal indicators development are shown in Table 1.Regarding VAT, tax rates were changed five times in the period 2005 to 2015 (for more information about VAT in the Czech Republic (see e.g. Siroký et al., 2014 or David, 2015). Focusing on income taxation, the most significant change is visible in the case of personal income tax (PIT). Beginning 1 January 2008 there has been a flat tax rate in place for all individuals within the Czech Republic (calculated from the so-called super gross wage). Regarding legal entities, the tax rate of corporation income tax (CIT) decreased from 26% in 2005 to 19% in 2015 (Schelleckens, ed., 2015). Primarily due to a reduction in the statutory CIT, the effective tax rate of corporate tax calculated according to the Deveroux methodology (discussed in more detail in Denis et al., eds., 2014) decreased in the analysed period by 6 percentage points (from 22.7% to 16.7%).The tax quota of the Czech Republic (as the most widely used indicator of the tax burden) was fluctuating around the average of EU28 in the analysed period. Rows 6 and 7 show the distribution of the total tax quota to the state budget and budgets of municipalities. The supplement consists of funds of social insurance, health insurance funds and payments to the EU budget.Figure 1 and 2 illustrate the development of the key macroeconomic indicators (unemployment and GDP) in all of the regions in the Czech Republic in the period 20052012.You can see that all of the regions show similar trends in the analysed period. Moreover, the impact of the economic crises in 2008 is also visible, since unemployment increased significantly in 2009 in all regions of the Czech Republic and GDP decreased in the same year in almost all of the regions within the Czech Republic.Regarding regional tax revenues, we can present the differences among particular regions in the Czech Republic using graphical expression. …