Impact of Tax Regime on Real Sector Investment in Russia

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 preferen-
tial tax treatment, while the less favorable is financing through retained earnings. The most preferential treatment re-
ceives household investment in higher education. Combined tax and budget system as of now provide significant subsi-
dies to "free of charge" education in state institutions and fairly small subsidies to "paid" higher education in commer-
cial sector. "Subsidizing" effect shrinks rapidly with continuing commercialization of higher education. Calculated es-
timates 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 cer-
tain 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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