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11.02.2020

Is the tax burden heavy in Kazakhstan? Is it necessary to increase taxes?

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Photo source: Depositphotos.com/ofoto

In our country among the population and scientific circles, there is a vague statement that the tax burden in Kazakhstan is too high. At the same time, making such statements, no one specifies what is meant by the tax burden, given that there are many methods of its assessment.

Moreover, no one provides scientific substantiation in the form of calculations for such statements. Although, of course, there is an objective need to calculate the optimal tax burden for Kazakhstan, and only on the basis of carefully conducted analysis we can say whether the tax burden is enormous for business entities.

The tax burden in economic theory is understood as the ratio of tax revenues to the state budget to the GDP of the country. If we follow the generally accepted approach, it is not difficult to notice that over the past 8 years, contrary to common misconceptions, the tax burden in our country has not been growing, but on the contrary, has been steadily declining from 15.7% in 2010 to 11.7% in 2018. At the same time, a significant role in reducing the tax burden from 2010 was played by the reduction of tax rates themselves in 2009 (in 2009, amendments were made to the Tax Code, where the CIT was reduced from 30% to 20%, VAT - from 13% to 12%, social tax - from 13% to 11%).

Более низкие ставки корпоративного налога характерны преимущественно для развивающихся и бедных стран, так как налоговая ставка для них становится единственным условием стимулирования бизнеса, поскольку остальные ключевые факторы успешного предпринимательства – стабильная политическая и макроэкономическая обстановка, инфраструктура, отвечающая потребностям экономики, и институты развития экономики – как правило, отсутствуют.

If we compare the tax burden on economic entities in our country with a similar burden of developed countries, we can see that it is relatively low. For example, in Denmark, the tax burden is 34.2% of the country's GDP, in Austria - 25.3%, in the UK - 25.4%. At the same time, as shown in the table below, for many types of tax rates in the economies of developed countries are significantly higher than in our country.

The corporate tax rate for 2018 by country, in %

Source: Tax Foundation: Corporate Tax Rates around the World

Lower corporate tax rates are mainly characteristic of developing and poor countries, as the tax rate becomes the only condition for stimulating business, as other key factors for successful entrepreneurship - stable political and macroeconomic environment, infrastructure that meets the needs of the economy and economic development institutions - are usually absent.

Of course, the comparative analysis provides good material for understanding the essence of the problem under study, but it is not sufficient to claim that the tax burden in Kazakhstan is low. To substantiate the assertion, special calculations should be made on the basis of the model built for this purpose. We have conducted such work to determine the optimal tax burden on economic entities based on the use of statistical data for the last 10 years. The optimal tax burden for business and the state will be different, because it is better for business - lower, for the state - higher. And this difference between the two options determines the severity of the conflict between business and government regarding taxation in the country. According to our calculations, the optimal values of the tax burden in 2018 for business and the government were not too different and were as follows:

for business, the optimal tax burden is 15.4%;

for the state (to maximize budget revenues) - 15.8%.

As we can see, the actual tax burden in our country, which amounted to 11.7% at the end of 2018, is much lower than the optimal 15.4% and 15.8%, which indicates the potential for an increase in the tax burden by almost 4%. As calculations show, in general, in Kazakhstan only in 2005-2006 the actual tax burden was above the optimal values. In other periods, the actual tax burden was below the optimal values.

The tax burden in Kazakhstan is not only low, it even has the potential to increase, contrary to all claims that it is high. However, speaking about the potential to increase the tax burden in this case, we do not call for an increase in tax rates in the country, as this measure has many different consequences for small, medium and large businesses.

The growth of the tax burden can be achieved in another way - by expanding the tax base, that is, by encouraging the emergence of new entrepreneurs in the country, intensifying the business activities of existing companies, increasing the income of the population. It is this kind of work that prevails in developed countries: high values of the tax burden are achieved through the growth of tax rates themselves, and expansion of small and medium-sized businesses in the country's economy and an increase in personal income. In other words, the growth of the tax burden is a consequence of the expansion of business activity in the country and the growth of the welfare of its population.

Unfortunately, in certain circles, there is a misconception that by lowering the rates of basic taxes it is possible to achieve growth of business activity. Indeed, underdeveloped and developing countries have in most cases applied tax cuts, believing that such actions would help stimulate business activity, while developed countries have higher tax rates, winning at the expense of other factors. For example, the corporate tax rate in Kazakhstan is 20%, in Russia – 20%, in Uzbekistan – 7.5%, while in Norway – 22%, in South Korea – 25%, and in the US – 27%.

At the same time, in many developed countries, the already high corporate tax payable to the state budget is accompanied by additional local taxes (by states and cities). For example, the corporate tax of 15% in Canada is supplemented by local taxes, which vary from 11.5% to 16% depending on the state. Nevertheless, Canada is ranked 23rd in the Ease of Doing Business ranking, whereas Denmark with the rate at 22%  is ranked third. The value of the tax rate itself does not serve as a decisive factor in stimulating/destimulating business activity in the country.

Thus, it is necessary to optimize the tax burden in Kazakhstan, first of all, to expand the taxable base by stimulating business activity of business entities, creating equal opportunities for taxation of business activities of different business entities, rather than by changing the current tax rate. Once again, it should be noted that reducing the rates is not in itself a panacea for business growth. Of course, such a measure may have a temporary effect, but the reduction of tax rates was already in 2009 - this measure has exhausted its potential, not giving a significant growth of the taxable base. On the contrary, as noted above, in recent years the country has seen a decline in the tax base, and this trend has accelerated after a marked transformation of fiscal policy in terms of creating preferential regimes for individual entrepreneurs and the self-employed population. This once again indicates that the problem of reducing the tax burden on the economy is related to tax rates, and created by the state itself of unequal competitive conditions for different types of business entities. Besides, of course, there are still problems with the development of business development institutions, transparency of mechanisms for the provision of various subsidies, government support measures, etc.

Thus, the expansion of the taxable base should take place on the basis of complex administrative and systemic measures aimed at equalizing the tax burden by types of economic activity and economic entities. However, implementation of such an approach requires, first of all, detailed analysis to determine the optimal tax burden for each type of economic activity. However, such research is complicated by the absence of the relevant statistical information on tax payments to the state budget by enterprises by types of economic activities. Granting access to such information will help to understand, what tax loading is optimum for various branches, sectors of economy and types of business, and also to reveal the potential for expansion of taxable base - certainly, not at the expense of tax rates growth.

Zhaksybek Kulekeev, Professor of Economics, Scientific Director of AERC

Evgeniya Pak, a leading analyst at AERC Consulting Services Department

 

«...Domestic business, the so-called national bourgeoisie, should be supported in every possible way, and those who prevent its development by unreasonable inspections, extortions, raids should be strictly punished...»

Statement from the President of Kazakhstan Kassym-Jomart Tokayev at an enlarged meeting of the Government on 15 July 2019

Zhursunov R.M.

Ombudsman for the Protection of the rights of Entrepreneurs of RK

The blog of the Ombudsman for the Protection of the Rights of Entrepreneurs of Kazakhstan was created for you to have an opportunity to appeal directly to me and I hope that it will contribute to a constructive dialogue between us – send me feedback, share opinions, make suggestions. All your comments without exception will be read by me.

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