Does fee rate increase lead to local budget increase?

June 25, 2015 Cherkasy City Council adopted decision № 2-1312 about interest rates of local taxes and fees in Cherkasy. The decision states the following interest rates on land rent: gas stations – 12%, gambling business – 12 %, land under temporary structures – 10%, other commercial land – 3%. The decision shall enter into force on January 1, 2016.

It’s doubtful that land fee increase might stimulate the renters to fulfill their rent obligations. After all, local government shall make decisions that shall have positive impact on overall community development especially on business.

Let’s analyze land fees policy theoretically. Might fee rate increase always lead to local budget increase?

In Economic theory of the past one might have heard about the Laffer curve. The Curve describes the dependence of the budget revenue on average tax rates in the country. Actually the Laffer Curve is an attempt to illustrate tax elasticity, so the curve represents the budget revenue that  is the function derived from the tax rate.

The amount of budget revenue from taxes at the points “L” and “N”  may be the same while the interest rate difference is huge  according to the graph. Thus, it’s advisable to refuse high rates and push the economy by lowering taxes. It will strengthen the local business and stimulate it to grow resulting in the tax revenue increase. In the long run tax losses will be compensated.

According to Laffer, lowering of fees stimulates business by cutting its expenses and makes them to reinvest in production. Although, the reduction of budget revenue occurs in short run, and is  temporary.

Low fee rate is attractive to entrepreneurs and businesses. High tax rate decreases budget revenue, leads to bankruptcy,  shadow economy etc..

Tax reduction might lead to increasing savings, investments and employment. After all production and income are going to  increase and amount of budget revenue also increases.

We strongly believe that the idea of quantitative easing of taxation should be taken into consideration  by Cherkasy local government.

One might wonder about Cherkasy council financial goals, quantitative budget plan, and Maths. On the other hand, if the Council`s tool to fill local budget with  land rent,  it is worth taking into account the following:  people who live in multi–storey houses (that belong to Building Maintenance Service) do not pay land rent unlike the Association cohabitants of multi–storey houses;  theland tenders and auctions are not conducted. Why is not  the system of automatic transfer of rights and obligations (on the land) at the transition of property rights established?  Summarizing, wemight ask: why instead of collecting money where it should be paid but is not paid, Council decided to increase the rent for diligent taxpayers?

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Jul, 20, 2015