Designing Income Taxation to Reduce Income Inequality in Russia: A Modeling Approach

This study explores the possibility of adjusting income tax parameters to achieve a specific level of income inequality in Russia. The hypothesis is that by altering the personal income tax design, it is possible to reduce income inequality to a specified level, as measured by the Gini coefficient. Key parameters include the maximum progressive tax rate, the lower income threshold for increased rates, and the tax-free allowance (either differentiated or universal). To test this hypothesis, I modeled income inequality reduction using the Gini coefficient. The procedure involved optimizing income distribution across decile groups and applying the Gini coefficient expression, which calculates the accumulated shares of decile groups in income distribution. The results are graphically represented using the Lorenz curve. Calculations were performed using the “Data Analysis” package in MS Excel with data from the Federal State Statistics Service and the Federal Tax Service of Russia. The study demonstrates, both theoretically and empirically, that it is possible to design a personal income tax system to reduce income inequality to a predetermined level, as measured by the Gini coefficient. Four personal income tax designs are described, aiming to reduce inequality to a Gini coefficient of 0.38. The findings suggest that to reduce inequality, it is advisable to introduce a tax-free allowance for the 1–6 decile groups (incomes not exceeding three times the minimum wage) equal to the minimum wage, and to increase the maximum progressive tax rate for very high incomes. For example, incomes exceeding 100 million rubles per year, which apply to 28.75 thousand taxpayers or 0.035% of the population, should be taxed at a rate of 35%. The most viable option is to set a 35% tax rate for incomes exceeding 100 million rubles per year, along with introducing a tax-free allowance. This approach could allow the government to accumulate up to 395 billion rubles annually in the budget.