WHAT WILL THE TAX RELIEF GIVE?

By Prof. Vladimer Papava

One of the most important issues of economic science and economic policy is the problem of tax burden on the economic activeness of population and collection of tax revenues in State Budget.

A quarter of century had passed since American economist, Arthur Laffer first ruled the curve (curve is known with his name from the very beginning) that does represent the influence of combined average tax rate on budget revenues. According to the above widely recognized curve, with an advance of combined average tax, increase the tax revenues in State Budget, but after the point known as Laffer Point, when these incomes reach maximal instance, increase of this determiner causes the reduction of tax revenues. The above connection between combined average tax rate and budget revenues is known as Laffer Effect.
According to classification by famous researcher of Laffer Curve Mr. E. Balatsky, investigation of this curve has distinguished two – theoretical and practical directions; the first one looks like parabola graphic basing on modeling of fiscal and production processes and is active with arguing the existence of Laffer Points; the second one is dedicated to correlation of these points to concrete countries.
The below article is aimed at specifying the graphical presentation of Laffer Effect based on generalization of the experience existing within investigation of self-expressions by Laffer Curve. The later inquiry is defining which of involved questions are myth or reality.
Basing on analyzing the idea and graphical presentation of Laffer Curve, E. Baletsky concluded that the curve relies on artificial postulates, because of which Laffer Curve theory, in the best case, is the only admirable hypothesis that is not ultimately corroborated.
There are number of disputable and debatable questions within the conceptual aspect and graphical representation of Laffer Curve. Many of recent economists are skeptical to it.
The empiric analyze conducted upon OECD (Organization of Economic Cooperation and Development) member countries has proved the above skepticism to Laffer Curve. Despite that, some inquiries carried out in countries with post-communist economies have revealed the principal possibility of Laffer Effect existence. Rather, important is the fact that many of widely recognized economists put the question of reducing the tax burden on the agenda right in these countries (for example: Gary Baker at Chicago University, Nobel Prize winner in economics appealing to Georgia; and Professor Jefrey Sax at Harvard University – to Ukraine), which, to their opinion, should encourage the economic activity and tax revenues in budget. Should also be mentioned that increase of budget revenues as the result of tax relief (which, of course, caused reduction of combined average tax rate) had been experienced in Georgia five years ago.
The economy of post-communist country, in difference with that of other, has one valuable habitude represented with huge “reserves” of unemployed production activities, which consequently gives the potential opportunity of expanding the production without significant investments and is one of the preconditions for revealing Laffer Effect.
For ruling the Laffer type curve with more realistic fiscal attitudes, it is important to stipulate the period that is needful for Laffer Effect.
Latest inquiries that may divulge that foreseeing the time factor, rather important is to define the direction of combined average tax rate – does it increase or decrease.
E. Baletsky has introduced the term of “aftereffect”, according to what increase of budget revenues caused by that of combined average tax rate could be followed by decrease of incomes only some years later. For explaining that effect, A. Dagaev uses the term taxation “Hysteresis” (Hysteresis in Greek means to delay). As Laffer Effect appears only the years later, word combination – Laffer Effect with taxation “Hysteresis”, or Laffer Effect with “aftereffect” is correct.
With the purpose of stipulating the time factor, fiscal curve that represents the above effect, to Baletsky’s opinion, should be ruled not with coordinates – “Tax revenues – Combined average tax rate”, but with those as follows: ” Tax revenues – Time”. To our one, more exact would be “Combined average tax rate – Tax revenues – Time”.
Should also be mentioned that this fiscal curve does not include Laffer Point, and Laffer Effect is too distinguished, because of taxation “Hysteresis”. As in ruling the curve we’ve relied on results of investigations by E. Baletsky, should be better, if we call it (the curve) the Fiscal Curve of Baletsk Version, or simply Baletsk Curve.
V. Vishnevsky and D. Lipnitsky have shown that taxation “Hysteresis” type of effect occurs even if the direction of combined average tax rate inclines to decrease. Like Baletsk Curve, this fiscal one is also too distinguished, because of taxation “Hysteresis”. Besides, Laffer Point does not exist here as well, because of which it can’t be called Laffer one any longer. As we’ve ruled this graphic relying on investigations by V. Vishnevsky and D. Lipnitsky, would be better, if we call it Fiscal Curve of Vishnevsky-Lipnitsky version.
And finally, should be pointed and italicized again that in elaborating the fiscal policy, biggest problem of each country is to describe the correct “location” of its economy on the Baletsky and Vishnevsky-Lipnitsky Curves.