The Republic of Vardar gained its independence at the beginning of 1990. It came because of the broke up of the Soviet Union. Thus, as a governing unit it has existed even before, but as a part of the larger state of the Soviet Union. Due to the new situation, the country had to organize an independent economy and fiscal system. It had also to organize an independent and efficient tax system that it had to manage by itself. Prior to that, they were part of the Soviet bureaucracy and the budget was centrally organized. They got their share of the budget without having to be self-sufficient in tax collection and sustenance. Now the situation had changed and they had to release a new monetary system, organize the fiscal policy and tax collection. Immediately in the first years that followed independence, they faced hyperinflation, unemployment and declining standards of living.
Another aspect they encountered was that of the rising share of the informal economy. The personal income tax was one of government’s attempts to have some income in its budget. The tax relied heavily on salaries and wages given by large employers, who had it difficult to hide the number of employees or activity. As a result, almost 30% of the total tax revenue came from this personal income tax. Nevertheless, a law passed in the winter of 2000 aims at reducing the personal income tax rate. The government forecast that this would result in a 25% decrease of the actual percentage of the tax revenue share of the personal income tax. The hope was that such reduction in tax revenues will be covered by the gain in new business booming and the formalization of the economy.
Having to launch a new currency because of independence is major factor in monetary policy. Having to adjust your tax collection and administration also is a major factor in fiscal policy. As of May 2001, the Finance Ministry of the Republic of Vardar forecast to collect 7,789,000 thousand markka (MK), which is the local currency. Since they forecast to have a 25% loss of the personal income tax share of the total tax revenues the expected part will be 22.5%. That percentage corresponds to the sum of 1,752,525 thousand markka. 7.5% of the remaining share of the personal income tax expects to come from the increase in business productivity, new business formation and legalization of existing informal business transactions. This seems to be a valid theoretical analysis. However, after reviewing the historical data of tax collection from the previous three years it seems pretty clear that this is a very difficult task. Our recommendation and argumentation regarding this issue will follow in the next section.
It is the strong belief of this paper that the data forecasted for tax revenue in May of 2001 are not realistic. They seem to be very difficult to say the least. Thus, it is our recommendation that the government revise such data. The only reason that the government can have to put forward such forecast data is that it expects to have a combination of high level of legalization of informal existing transactions and a boom in new businesses. Such combination seems to be quite difficult to achieve in a country with unemployment and hyperinflationary period.
We base our recommendation in a series of reasons. In the current forecast, the government expects to have the highest rate of collection in January (714,981 thousand markka) and then a steady lower rate around the 580,000 thousand markka. That is strange since consumers and businesses do not tend to spend much at the beginning of a new year, especially if they have spent during the end of the previous year (Uzawa, 1965).
Furthermore, in all the three previous tax years, January was the month with the least tax revenues. Such revenues would increase gradually in the months to come. This is the opposite of the current prediction. Furthermore, if we compare the month of January in 1998, 1999 and 2000 we see a steady decrease in revenues from roughly 668 thousand markka to 559 thousand markka. It seems logical to continue the trend in the 2001 forecast, instead of projecting an almost 30% increase in January tax revenues. For the following three months, February, March and April, the forecast is of stable revenue with a very slight increase from approx. 575 thousand to 583 thousand and finally 586 thousand markka. That is opposite to the trend established in the previous three years where tax revenues have been at least 35% more in value then the 2001 forecast.
Based on the previous recommendation and its argumentation this paper argues that the Ministry of Finance should revise its forecast for 2001. A more realistic forecast is to acknowledge the decrease in revenues due to the lowering of the personal income tax rate and follow the trend established in the previous three years. This forecast still lacks assurance since we need to know the expected rate of new business openings and the expected rate of legalization of the informal transactions in order to give a more accurate forecast. Since the Ministry of Finance has not forwarded such information, we have to proceed with what we already have. January 1999 has 6.5% decrease in revenues compared to January 1998. January 2000 resulted in a 10.5% decrease in revenues compared to January 1999.
By the same logic we would expect January 2001 to have a 14.5% decrease in revenues compared to previous year. Furthermore, the forecast has to account for the 25% decrease in income tax revenues, which is equivalent to 7.5% decrease to the total tax revenues. Because the decreasing rate from the cut in income taxes is superior to that of the trend, this might result in stopping the negative pattern of the previous three years. The result will be a 3.5% decrease because of income tax rate lowering. Instead of 714,981 thousand, in January 2001 the government can expect to collect 539,503.4 thousand markka. By following the same logic, in February they can forecast 843,410 thousand, in March 953,465.4 thousand and in April 883,969 thousand markka.
This paper was about the evaluation of the forecast from the Ministry of Finance of the Republic of Vardar regarding tax revenues for the year 2001. This paper presented an alternative forecast to the existing one along with the arguments for this new forecast. Nevertheless, many factors can influence patterns in tax revenues. Among them, legalization of informal business transactions and the growth of new business openings can massively positively affect tax revenues of a country (Luca, 1988).
Unemployment is another important factor to consider. It negatively affects tax revenues of a country and in turn they influence the rate of employment (Plosser, 1989).
Luca, R. (1988). On the Mechanisms of Economic Development. Journal of Monetary Economics, 22, 3-42.
Plosser, C. (1989). Understanding Real Business Cycles. Journal of Economic Perspective, 3(3), 51-57.
Uzawa, H. (1965). Optimal Technical Change in An Aggregate Model of Economic Growth. Internal Economic Review, 6, 18-31.