Impact of tax regime on real sector investment in Russia: marginal effective tax rates for physical, human and R&D capital
In this paper we present theoretical framework for quantitative assessment of tax burdens on investments in physical, human and R&D capital in Russia. The modified and extended version of King–Fullerton model for computation of marginal effective tax rates on marginal hypothetical investments was used. Calculations performed show non-neutrality of tax treatment of investment across types of assets and types of financing. Debt financing receives preferential tax treatment, while the less favorable is financing through retained earnings. The most preferential treatment receives household investment in higher education. Combined tax and budget system as of now provide significant subsidies to "free of charge" education in state institutions and fairly small subsidies to "paid" higher education in commercial sector. "Subsidizing" effect shrinks rapidly with continuing commercialization of higher education. Calculated estimates of tax burdens on investment in physical capital are more or less compatible with those in the OECD countries. The less favorable tax treatment in Russia is on investment in R&D. Tax burdens are especially high for short-lived successful investment and almost prohibitively high for partially unsuccessful R&D investment projects. Such tax treatment of R&D investment contrasts sharply with practices of many OECD countries, which provide tax incentives to risky investment and where governments share risks with private investors. Simulations performed showed that certain adjustments in the Russian Tax Code could reduce the tax load on investment in risky R&D projects. Analysis of sensitivity of computed tax burden to estimated parameters is done.
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