Economics and management of national economy

Taxation, economic growth and welfare in a low-income country

Economic Annals-XXI

Economic Annals-ХХI: Volume 181, Issue 1-2, Pages: 44-56

Citation information:
Krysovatyy, A., Fedosov, V., Tymchenko, O., & Silchenko, M. (2020). Taxation, economic growth and welfare in a low-income country. Economic Annals-XXI, 181(1-2), 44-56. doi: https://doi.org/10.21003/ea.V181-04

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Andriy Krysovatyy
D.Sc. (Economics),
Professor, Rector,
Ternopil National Economic University
11 Lvivska Str., Ternopil, 46020, Ukraine
rektor@tneu.edu.ua
ORCID ID: http://orcid.org/0000-0002-5850-8224

Viktor Fedosov
D.Sc. (Economics),
Professor,
Kyiv National Economic University named after Vadym Hetman
54/1 Peremohy Ave., Kyiv, 03057, Ukraine
finance_kneu@ukr.net
ORCID ID: https://orcid.org/0000-0003-1092-4218

Olena Tymchenko
D.Sc. (Economics),
Professor,
Kyiv National Economic University named after Vadym Hetman
54/1 Peremohy Ave., Kyiv, 03057, Ukraine
o_tymchenko@ukr.net
ORCID ID: https://orcid.org/0000-0002-8143-1261

Maryna Silchenko
PhD (Economics),
Associate Professor,
Kyiv National Economic University named after Vadym Hetman
54/1 Peremohy Ave., Kyiv, 03057, Ukraine
silchenkomv@kneu.edu.ua
ORCID ID: http://orcid.org/0000-0003-4929-2561

Taxation, economic growth and welfare in a low-income country

Abstract. Tax policy should promote not only economic growth but also the well-being of citizens. Otherwise, the problem of economic growth will arise again. This issue is relevant for many low-income countries. The governments of such countries can achieve some GDP growth and stabilize public finances. However, if such growth is accompanied by impoverishment of the population that is unable to meet the corresponding consumer demand, it leads to GDP fall and lack of financial resources.

We seek to find out how the tax burden and tax structure affect economic growth and welfare in Ukraine taking into account international experience. For this purpose, we analyze the correlation between the tax burden and GDP and based on the method of chain substitutions reveal the impact of the compensation of employees (salaries), taxes and gross surplus on GDP growth and confirm our main hypothesis that the tax burden increase does not lead to GDP reduction in Ukraine. There is a direct connection between the tax burden and GDP in Ukraine. The GDP decreases with a lowering in the tax burden and, accordingly, grows with its increase.

Such correlation complicates the decision-making on further improvement of the tax system of Ukraine to realize the purpose of sustainable economic grows. On the one hand, in comparison with other countries the tax burden in Ukraine is not much higher, but it is criticized by the business. On the other hand, the Ukrainian Government has a permanent problem which is a lack of necessary resources for funding public expenditures. Therefore, when making decisions, the impact of certain types of taxes and changes in the tax structure should be taken into account.

The study showed that the corporate income tax rates reduction had a positive effect on investment dynamics, and excise taxes increase has led to the reduction of legal production and increase of shadow sector. VAT (20%) has a neutral effect on GDP growth in Ukraine, while the introduction of 7% VAT on medicines has led to an increase in prices and changed the structure of consumption towards the low-priced goods. The changes (increase) in personal income taxation have reduced consumer demand and hampered GDP growth and welfare.

The authors give the recommendations regarding changes in the tax policy of Ukraine based at own empirical findings and with regard to the current institutional peculiarities of Ukraine.

Keywords: Tax; Tax Policy; Tax Burden; Economic Growth; Well-Being; VAT; VAT on Medicines; Ukraine; Low-Income Country

JEL Classification: G28; H20; H24

Acknowledgements and Funding: The authors received no direct funding for this research.

Contribution: The authors contributed equally to this work.

DOI: https://doi.org/10.21003/ea.V181-04

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Received 14.11.2019
Received in revised form 21.12.2019
Accepted 12.01.2020
Available online 10.02.2020
Updated version of the paper as of 20.04.2020

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