The Concept of Tax Elasticity as a Measure of Taxation System Efficiency in Ukraine

Abstract

Rather than allocating resources and setting quarters for output, the state in transition countries now provides certain public services, such as national defense, law enforcement, environmental protection, and social security nets for vulnerable sections of population. The success of such government activity significantly depends on the budget revenues collected from taxation. In assessing the efficiency of a tax system in terms of collecting revenue for the budget and determining the scope for necessary reforms the concept of tax elasticity is useful. It is often of interest to have a measure of how “responsive” tax revenue is to some changes in tax rate or any other taxation requirements. One of such measures is elasticity that can give a picture of built-in flexibility of taxation system in terms of raising budget revenue. Therefore, our analysis applies the concept of elasticity of a particular tax with respect to GDP and the tax base. This can allow to evaluate the efficiency of current Ukrainian tax system. We use the elaborate econometrics models to investigate different aspects of the elasticities of Ukrainian tax system. Special attention was paid to VAT (Value Added Tax) as one of the main sources of budget revenue. The issues of whether in Ukraine VAT works properly in terms of budget revenue collecting and stimulating economic activity are examined. The responsiveness of VAT revenue and the budget execution on VAT with respect to changes in the tax base were estimated. The empirical analysis showed that efficiency of Ukrainian tax system in terms of raising budget revenue can be enhanced by simplifying the tax law, lowering and differentiating the tax rate. Simple and transparent tax law allows taxpayers to diminish compliance and administrative costs. Lowering and differentiating the tax rate implies different tax rate for different goods and services that in their turn could expand the tax base. Based on examined models the improvements in VAT implementation were proposed.