Article

 

Informal tax competition on a regional level : the russian scenario (p.109-121)

by

Andrei Yakovlev, Institute for Industrial and Market Studies, State University – Higher School of Economics (Moscow, Russia)

Keywords : Russian economy, tax evasion, tax competition

JEL classification : D21, H26, O17

Abstract

One major problem of the Russian economy is large-scale tax evasion. Using standard assumptions of tax competition theory it is possible to show that under certain conditions it is not profitable for regional governments to suppress tax evasion. Indeed, the decrease of regional tax rate can lead to a decrease of subsidies and financial transfers from central government. Therefore a better instrument for the region to attract a taxpayer is the change of informal tax regime. Taxpayers are informally allowed not to pay a part of regional and federal taxes and regional governments have not to choose between high or low tax rates, but whether to suppress or to ignore tax evasion. Thus weakness of the federal government enforces opportunistic behavior of the regional governments and eventually leads to tremendous losses primarily for the federal budget. Moreover, massive tax evasion occurs even without corruption of taxation authorities or regional governments.