Personal Income Tax and Revenue Forecasting
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It should be pointed that public budgeting process includes drafting stage that is prior to the fiscal year and contains main forecasts for budget revenues and expenditures. Legislature stage, when authority body approves, rejects or forces the developers to amend it. Implementation stage is followed by audit and results assessments. This paper investigates a first stage of public budgeting - revenues forecasting in particular a case study on the state’s tax policy and public revenues in form of different tax collections. The focus is put on changes in personal income tax rates and its influence on the public budget’s revenues figures.
Analyzing the data provided in the case study, it should be pointed that the personal income tax is one of the most significant resources of the state budget revenues. It accounts for approximately 30 percent of the total revenues. Considering provided tax figures in detail, it should be highlighted that budget revenues consists of various taxes (corporate tax, personal income tax, sales tax, unemployment insurance tax, and property tax), license sales, fees and intergovernmental transfers. When finance committee tries to evaluate future level of public revenues such factors as tax rates, retail sales and building permits issued should be regarded (Morgan & Robinson, 2002).
Taking into consideration the fact that the country officials decided to improve economic situation in the country through the decrease in personal income tax by 25 percent, it was rather controversial to expect that many economic entities operating in the “shadow market” would become official taxpayers. It should be also underlined, that at the previous rates of personal income tax, the main taxpayers withholding such a tax from salaries and wages were large corporations. After the reduction in the personal income tax level, such entities would simply pay less. Though, there is a question whether such a decrease is significant for hose who consciously decided to operate at the unofficial market to become honest taxpayers.
It is considered that 25 percent reduction in personal income tax rate (30 percent* 0.75 = 22.5 percent) will decrease the total revenues inflow to the budget by 7.5 percent. Therefore, if the representatives of the budget committee assume that all basic economic conditions are the same as in 1999 and 2000, where the state revenues level is nearly the same, than the total revenues forecast will be equal the average figure of these two year-revenues sums multiplied by 92.5 percent (100 - 7.5). In figures, it is represented as follows. A year of 1998 with its total 9,177,132.10 thousand markka was transitional year after the implementation of the personal income tax. Therefore, it will not be included into the calculations.
1999 and 2000 years demonstrated 11.5 percent and 16.0 percent increase in budget revenues inflow comparing to 1998. As far as there is no additional data about the future market situation and it is assumed that in 2001 there will not be a sharp increase in the official taxpayers especially large ones, 2001 revenue forecast should amount to 92.5 percent of the average 1999 and 2000 figures. In 1999, total tax collections accounted for 10,233,016.4 thousand markka, and in 2000, this figure accounted for 10,649,679.6 thousand markka. Therefore, the forecast for 2001 should be as follows: (10,233,016.4 + 10,649,679.6)/ 2 * 0.925 = 9,658,246.9 thousand markka.
As the case study forecast equals to 7,789,000 thousand markka for 2001, the conclusion could be made about incomplete information about future economic indicators in particular planned rates of economic growth and correlating with this data volume of the largest business entities profits. This figure is underestimated, and it is essential for the overall budget process. Public budget with revenues and expenditures as its structural parts is aimed at creating a balance between the revenues and thee most important for the public good programs funding. As Morgan and Robinson (2002) stated “underestimation of revenues leads to reduced spending that may fail to meet critical needs, while the over-estimation of revenues leads to program cutbacks part way through the budget cycle.” Fiscal policy of the government not only depends on the economic factors but also considers political situation in the country.
Regarding the prediction on the tax collection in May of 2001, it should be stated that seasonality is presented in the data provided in the case study’s table. For instance, the biggest volumes of taxes were collected in April, July and December, while the lowest tax inflows were recorded in January and May.
Moreover, the figure for the January 2001 is totally incomprehensible. This month is the lowest business activity period. Besides, the previous tendency proved this fact. Without possessing any additional information on the economics state such as another tax rate structures, unemployment data, cyclical or seasonal variation, changes in demand in 2001, the forecast for May 2001 can be calculated applying time series approach of quantitative methods in particular random walk approach. It means that 2 prior periods are chosen for the estimation and cyclicality, seasonality, and randomness should be considered (Morgan & Robinson, 2002).
The figure of collected taxes in 1999 accounted for 756,507.90 thousand markka and it was 7.39 percent of the total tax collections in 1999. Correspondingly, tax collections in 2000 were equal to 800,876.80 and this figure was 7.52 percent of the total volume of taxes collected in 2000. The tendency in growth is 0.13 percent. Considering that fact that all figures will be decreased by 7.5 percent, forecasting figure for May 2001 will be (7.52 + 0.13)*0.925 = 7.08 percent of the forecasted total tax collections in 2001, that is 9,658,246.9 thousand markka * 0.0708 = 683,803.88 thousand markka.