CHAPTER 5.

FISCAL MEASURES FOR ECONOMIC STABILIZATION

5.1. Fiscal Policy and Its Essence

One of the main tasks of the state is to stabilize the economy. Such stabilization is achieved
not only through monetary policy tools but also through fiscal policy. Fiscal policy is also
referred to as budget-tax policy.

Budget-tax policy refers to measures that include changes in government expenditures and
taxes aimed at ensuring full employment in the economy, equilibrium in the balance of
payments, and economic growth under conditions of non-inflationary GDP production.

In situations where the economy is in a period of stagnation or decline, the state pursues a
stimulating fiscal policy - fiscal expansion. That is, in the short term, the state solves the
problem of economic downturn by increasing government expenditures or reducing taxes,
or by carrying out both simultaneously. In the long term, high government expenditures
and reduced taxes can lead to an increase in factors of production and, consequently, a rise
in economic potential. However, this can only be achieved through the effective use of
monetary policy conducted by the Central Bank and by bringing the structure of
government expenditures to an acceptable state. In situations where full employment and
excessive demand in the economy may lead to inflation, a restrictive fiscal policy - fiscal
restriction - is pursued. Restrictive fiscal policy involves limiting the cyclical growth of the
economy by reducing government expenditures (G) or increasing taxes (T), or by
implementing both measures simultaneously. In the short term, these measures reduce
demand-pull inflation. In the long term, however, high taxes can lead to economic
stagnation. This undermines the country's economic potential. Inefficient use of
government expenditures can be an additional impetus for this.

Discretionary fiscal policy refers to the targeted changes in government expenditures,

taxes, and the state budget balance resulting from the government's adoption of specific
decisions aimed at changing the level of employment, production volume, inflation rates,
and the state of the balance of payments.

When discretionary fiscal policy is implemented, during an economic downturn,

government expenditures are increased and taxes are reduced to stimulate aggregate
demand, resulting in a government budget deficit. Conversely, during a cyclical upswing,
a budget surplus is created.

Although discretionary fiscal policy plays an important role in smoothing economic

fluctuations, it has some shortcomings. First of all, it is related to time lags. That is, there
is a certain time gap between the emergence of a downturn or inflationary pressure in the
economy, the identification of these situations, the decision-making to change government
expenditures and tax revenues to solve the arising problems, and the process of ensuring
the implementation of this decision. During this time, the economic situation changes, and
the taken measures may not yield the expected results. Therefore, there is a need to create
a mechanism that automatically smoothes cyclical fluctuations.

Non-discretionary fiscal policy involves the automatic change of government expenditures,

taxes, and the state budget balance. Non-discretionary fiscal policy is based on built-in
stabilizers. In developed countries, the progressive tax system, the system of government
transfers, and the profit participation system serve as built-in stabilizers. Non-discretionary
fiscal policy does not require direct government intervention to smooth cyclical
fluctuations. Under conditions of a cyclical downturn, tax rates decrease due to falling
incomes. This leads to an increase in aggregate demand, expansion of production, and the
emergence of incentives. Also, during a downturn, government transfers, including
unemployment benefit payments, increase. This situation also has a positive impact by
increasing aggregate demand and the volume of aggregate supply.

During an economic upswing, under conditions where excessive demand has an

inflationary impact on the economy, tax rates decrease with rising income levels, and this
has a restrictive effect on aggregate demand. At the same time, government expenditures
(benefits for the unemployed, several types of state transfers) also decrease. However, non-
discretionary fiscal policy tools do not allow for the complete smoothing of economic
fluctuations and do not negate the implementation of discretionary fiscal policy.

5.2. The State Budget and Ensuring Its Execution

The budget consolidates the main part of state revenues and reflects the necessary fund of
monetary resources for the implementation of the state's socio-economic and political
tasks.

Through the state budget, the gross domestic product created in society is redistributed.
The redistribution of the gross domestic product arises from the general needs of society:
education, healthcare, economic and political stability in the country, material support for
socially vulnerable segments of the population, peace, border security, and the necessity of
having state reserves stored for emergencies. Also, through the state budget, the state gains
financial leverage to influence the process of social reproduction in society. The state
budget, as the state's main financial plan, creates the financial basis for the economic
capabilities of state power.

The level of established economic stability depends on the amounts of cyclical budget
deficits and surpluses. Cyclical deficit (surplus) is the state budget deficit (surplus) that
arises as a result of the automatic decrease (increase) in tax revenues and the automatic
increase (decrease) in government expenditures under conditions of decreasing
(increasing) economic activity.
During the cyclical downturn phase, a budget deficit arises due to the automatic decrease
in taxes and the increase in state transfers.

During the cyclical upswing phase, a budget surplus appears due to the automatic increase
in taxes and the decrease in government expenditures. Even if government expenditures
remain unchanged, a budget deficit and surplus can exist.

Built-in stabilizers do not fully eliminate the reason for fluctuations of equilibrium GDP
volume around its potential level and can exist at any level of production.

As a result of implementing a discretionary fiscal policy aimed at ensuring full

employment, a structural deficit (surplus) of the state budget arises, i.e., the difference
between budget expenditures (revenues) and revenues (expenditures) under full
employment conditions.

The cyclical deficit is often assessed as the difference between the actual budget deficit
and the structural deficit.

Methods of financing the state budget deficit:

1. Money and credit emission.

2. Issuance of government bonds.
3. Increasing tax revenues to the state budget.
4. Financing through funds from privatization.

When the state budget deficit is covered by printing money, increasing the money supply
in circulation leads to inflation. When the inflation rate rises, the Oliver-Tanzi effect
appears. That is, cases of taxpayers deliberately delaying tax payments to the state arise.
This leads to an increase in the state budget deficit. If, due to the budget deficit, the state
purchases goods and services from private producers but delays payments, private
producers preemptively raise the prices of their products. This leads to an increase in
inflation.

If the state budget deficit is financed by issuing government bonds, the demand for money
increases as a result of their sale. This, in turn, can lead to an increase in the interest rate.
Consequently, investment expenditures, net export volume, and partly consumption
expenditures decrease. Subsequently, a crowding-out effect occurs, which weakens the
stimulating effect of fiscal policy.

Although this method of financing the budget deficit is considered non-inflationary, it only
delays the risk of inflation for a certain period. Because when the bonds mature, the state
increases the money supply in circulation by redeeming them. This, in turn, causes the
price level to rise. Increasing tax revenues is the third way to finance the budget deficit,
which requires conducting tax reforms that take a long time. These reforms involve
expanding the tax base, reducing tax rates, shifting the tax burden more from producers to
property owners and users, thereby increasing tax revenues.

Methods to reduce the budget surplus include withdrawing money from circulation and
paying off state debts.

Paying off state debt can increase nominal incomes and the money supply in circulation,
leading to a further rise in the price level. Therefore, freezing surplus funds in the budget
is a relatively non-inflationary method of reducing the budget deficit.

As a result of the consistent macroeconomic policy carried out in the initial stage of
stabilization, the state budget deficit was reduced and amounted to 0.4% of GDP in 2003
and 2004 (12% in 1992). This is a much lower indicator than the commonly accepted 3%
norm. The budget deficit was financed mainly through non-inflationary methods, i.e.,
through the issuance of government bonds and funds from privatization.

As a result of reforms implemented in recent years, the stability of public finances has been
observed, and the following have been of significant importance:

• The adoption of the new edition of the Tax Code ensured further improvement of
the legal status of the tax system;
• Further reduction of the tax burden and improvement of tax administration opened
a wide path for entrepreneurial activity;
• Taking into account the special importance of the state budget and extra-budgetary
targeted funds in forming a strong social protection system and ensuring its stable
financial support, socio-cultural measures and social protection expenditures for the
population gained priority in the structure of state budget expenditures. As a result,
social support for citizens was strengthened by further improving the population's
standard of living, steadily increasing their incomes, and increasing wages,
scholarships, social benefits, and pensions above the inflation rate;
• The introduction of the treasury system for state budget execution ensures its
effective execution in accordance with unified standards and procedures;
• The establishment of the Reconstruction and Development Fund led to the
formation of effective sources for financing the modernization and technical re-
equipment of key sectors of the real economy, implementing effective structural
reforms, and investment policy.

Especially, this fund is of particular importance in ensuring the effective implementation

of measures outlined in the anti-crisis program;

• The stability of local budgets, which are one of the main financial sources for
implementing socio-economic reforms at the local level, was ensured as a result of
reforms aimed at further strengthening their revenue base and weaning them off
subsidies.
Institutional reforms in the state budget system:

• Establishing the procedure for financing budget organizations;

• Improving budget classification;
• Forming medium-term budgets;
• Introducing the treasury system.

Treasury – is a form of ensuring the execution of the State Budget, which ensures the
accumulation of state budget revenues in a single treasury account, controls the use of
budget funds, and also serves in managing the state's external and internal debts, and
monitors cash flows of extra-budgetary targeted funds and extra-budgetary funds of budget
organizations.

The objectives of transitioning to treasury execution of the State Budget:

• Effective management of the State Budget;

• Efficient use of State Budget funds;
• Strengthening control over the targeted use of budget funds;
• Shortening the preparation time and further improving the quality of reporting on
State Budget execution.

Tasks of the Treasury:

• Cash execution of the State Budget;

• Exercising control over the receipt and expenditure of State Budget funds;
• Management of State Budget funds;
• Making payments from the State Budget on behalf of and by order of the legal or
physical persons for whom the funds are intended;
• Registration of contracts concluded by budget organizations for the supply of goods
(performance of works, provision of services), as well as contracts for capital
construction concluded by customers at the expense of State Budget funds;
• Maintaining accounting records of the State Budget treasury execution;
• Collection, processing, and analysis of information on the progress of State Budget
execution;
• Servicing the internal and external state debts of the Republic of Uzbekistan,
fulfilling the guarantees of the Republic of Uzbekistan.

Stages of transition to the Treasury:

1. Starting from June 1, 2005, some elements of state budget treasury execution were
experimentally implemented in Tashkent city and Samarkand region;
2. From 2006, the treasury execution of the state budget was gradually implemented
in seven regions (Samarkand, Namangan, Bukhara, Tashkent city, Sirdaryo,
Surxondaryo, Khorezm, Republic of Karakalpakstan).
The remaining regions were covered in 2007. (Andijan, Jizzakh, Kashkadarya, Navoi,
Tashkent, Fergana regions).

Positive results of Treasury implementation:

• The mechanism of gradual financing to lower-level budget organizations was

eliminated;
• The scattering of budget funds across numerous bank accounts was stopped;
• Funds were accumulated in the treasury account, and as a result, the time for making
payments, including salary payments, was shortened;
• The efficiency of the budget funds circulation process increased.

The tax-budget policy conducted in our Republic is aimed at ensuring macroeconomic

stability, prioritizing investments in key sectors, rapidly developing the education sector,
and socially protecting the population.

One of the important indicators of the macroeconomic stability observed in our country is
the execution of the state budget with a surplus. In particular, although the state budget was
planned with a deficit in recent years, it is being executed with a surplus due to the
overfulfillment of forecast indicators for taxes and ensuring the targeted and purposeful
spending of state budget expenditures.

As can be seen from Chart 5.3, from 2000–2004, the country managed to reduce the state
budget deficit from -1.0% to -0.4%, and from 2005–2008, to halt the state budget deficit
and increase the state budget surplus from 0.1% to 1.5%.

Chart 5.1. State Budget Performance Indicators in the Republic of Uzbekistan, as a

percentage of GDP.
Despite the negative impact of the world financial-economic crisis on these processes in
recent years, it has been possible to maintain the budget surplus. In 2015, as a result of
targeted measures, the volume by which budget revenues exceeded its expenditures
reached the level of 0.1% of GDP. In general, such results in the field of the state budget
were significantly influenced by factors such as the gradual transformation and
liberalization of our country's economy, the transfer of a number of tasks previously under
state responsibility to the private sector, optimizing state budget expenditures, the
development of new industrial directions, the strengthening of the financial condition of
the private sector,

32Data from the Ministry of Finance of the Republic of Uzbekistan and the increase in its
role and share in the country's economy.

The intensification of the budget deficit inevitably leads to state debt. That is, the budget
deficit is mainly covered by state debt, which consists of internal and external debts.

In Uzbekistan, the issue of external debt was approached comprehensively and

thoughtfully from the very first stages of our independent development.

Chart 5.2. Dynamics of the External Debt Level of the Republic of Uzbekistan, as a
percentage of GDP
In Uzbekistan, strict and important principles have been followed in obtaining external
debt and credits, including their provision for the long term and at low interest rates, the
absence of any political or ideological demands and conditions attached to lending, and
their orientation towards national interests, mainly developing the real economy and
improving the welfare of the population. By the end of 2015, this allowed the external
state debt to constitute 18.5% of the gross domestic product.

The low level of external debt ensures the stability of the country's gold and currency
reserves. For instance, in 2014, the volume of gold and currency reserves increased by 1.6
billion dollars, and currently, there are gold and currency reserves that cover more than 20
months of imports.
 5.3. Features of Regulating the Economy through Taxes in Uzbekistan

Taxes are the main source of state budget revenues, and the most priority directions of tax
policy in 2015 were as follows:

• Further reducing the tax burden for business entities, taking into account the state's
fiscal interests, wherein the tax burden on direct taxes was of particular importance,
ultimately creating opportunities for expanding production and creating new jobs;
• Tax administration was further simplified, and the transparency of the tax system
was increased by ensuring the stability of tax legislation.

Taxes express monetary relations representing a mandatory payment, and these relations
arise between taxpayers (legal and physical persons) and the state, which appropriates the
tax.

There are also monetary payments when enterprises and organizations provide services to
the population, perform works, or engage in trade in markets. But they are not taxes. For a
tax relationship to exist, the state carries out the process of forcibly collecting funds for the
state budget through the redistribution of the value of the gross domestic product created
in the country.

Taxes have their own specific characteristics: obligation, payment to the treasury, strictness
and permanence, and non-equivalence for a specific taxpayer.

In world tax policy experience, great attention is paid to the following directions of
taxation:

1. Creating the most favorable economic conditions for the economic activities of
enterprises and organizations adapted to various forms of property, providing
comprehensive assistance for their entry into market relations;
2. Providing the state with the necessary financial resources to perform socially
necessary state tasks;
3. Participating in the formation of new socio-economic factors under market economy
conditions, providing employment for the unemployed, assisting the economically
vulnerable;
4. Seeking and ensuring the possibility of maintaining the population's standard of
living at a necessary level, periodically increasing the non-taxable income
minimum. Here, data from the "consumer basket" is taken into account.[34]

The tax system is referred to as the totality of types of taxes and levies that mandatorily
form centralized monetary funds and other state funds. This definition shows the unified
nature of taxes and levies, i.e., "relations of a mandatory character," their interconnection,
and ultimately, their payment into the budget. This corresponds to the content of the Tax
Code of the Republic of Uzbekistan. There is also a contentious issue here, namely the
problem of including payments to state extra-budgetary funds (pension, social insurance,
employment, road funds, etc.) into the tax system from the point of view of obligation.
According to the Tax Code of the Republic of Uzbekistan, the tax system includes state
taxes and local taxes and levies (Table 5.1).

Table 5.1

Composition of the Tax System in the

Republic of Uzbekistan

State Taxes. Local Taxes and Levies

1. Tax on income (profit) of legal 1. Property tax.

entities. 2. Land tax.
2. Tax on income of physical persons. 3. Single tax.
3. Value Added Tax. 4. Tax for infrastructure development.
4. Excise tax. 5. Consumption tax on fuel for physical
5. Tax on use of mineral resources. persons' vehicles.
6. Tax for use of water resources. 6. Single customs payment for physical
7. Tax on gross income from trade and persons importing goods.
public catering organizations. 7. Fee for trading rights, including license
8. Customs duty. fees for selling certain types of goods.
9. State duty. 8. Fee for registration of entrepreneurs, legal
10. Fee for registration of securities. and physical entities.
11. Other revenues. 9. Other payments.

As can be seen from Table 5.1, currently, the Tax Code includes 7 state (republican) taxes
and 5 local taxes.

Taxes are grouped by object and economic nature. The grouping of taxes is a scientific and
practical method of studying their positive and negative impacts on the economy.

Taxes are divided into four groups according to the object of taxation:

• Taxes levied on turnover;

• Taxes levied on income;
• Taxes levied on property value;
• Taxes levied based on land area.

Taxes levied on turnover include Value Added Tax, excise tax, customs duties, and taxes
levied on the value of mineral resources. However, according to our legislation, the concept
of turnover is not measured by the turnover from product sales as before, but by the value
of shipped products. The single tax levied on gross income also belongs to taxes on
turnover.

Taxes levied on income include tax on income (profit) of legal entities, tax on income of
physical persons, and taxes levied on the gross income of trade organizations. The tax for
social infrastructure development also belongs to this group of taxes.

Taxes levied on property value include property tax, ecology tax, tax on resale of
automobiles, and others.

Taxes levied on land areas include the single land tax for agricultural commodity producers
and land taxes of legal (non-agricultural) and physical persons.

Based on economic nature, taxes are divided into indirect and direct taxes.

Direct taxes are paid directly by the taxpayers themselves, i.e., the legal payer and the
actual payer of the tax are the same person. There is no shifting of the direct tax burden to
others here. This includes all taxes paid from income and all property taxes.

"Since direct taxes are paid directly from income, reducing tax rates allows enterprises to
keep a larger part of their income, creating opportunities to expand investment activity and
develop the market economy. If the rates of these taxes are increased, business
opportunities diminish and economic development slows down. Thus, the rates of this
group of taxes are closely linked to the market economy."*

Legal payers of indirect taxes are those who ship products (perform works, provide
services). However, the actual bearers of the tax burden who ultimately pay it to the budget
are the consumers of the goods (works, services), i.e., the real taxpayers are hidden here.
These taxes are added as a markup to the price of the good (work, service).

The positive aspect of these taxes is that they limit the outflow of goods produced in the
country and help increase the availability of goods within the country. If the prices of goods
are not increased through indirect taxes, their shortage in the markets increases. A justified
increase in indirect tax rates does not directly affect the financial results of enterprises'
activities, i.e., it does not reduce investment activity. However, if the tax rate is increased
without analysis, enterprises may face difficulties in selling their products, and their profits
and payments to the budget may decrease.

Another aspect of these taxes is that they reduce the excess money supply in circulation
and curb the crisis. However, these taxes reduce the real income of the employed
population. The opportunity provided by reducing direct tax rates for enterprises should
lead to increased production of more goods and an expansion of the product range.

In world tax practice, based on the ratio of direct and indirect taxes, one can analyze the
development or presence of economic difficulties in a particular country's economy. For
example, in the USA, the share of direct taxes being close to 90% in budget revenues
indicates the existence of a developed market economy there.

Indirect taxes include VAT, excise tax, customs duty, and taxes on the use of mineral
resources. As mentioned above, direct and indirect taxes form a unified tax system and are
interconnected. With the total tax amount unchanged, reducing the rate of one requires
increasing the rate of the other.

5.4. Ways to Simplify and Unify the Tax System and Reduce the Tax Burden

In the first years of our Republic's independence, the main direction of state tax policy was
to introduce a number of scientifically based taxes aimed at strengthening market relations
and thereby fundamentally reorganizing the existing tax system. The subsequent direction
of tax policy was aimed at establishing relevant institutions implementing tax relations to
ensure the effective functioning of the introduced taxes. In particular, initially the Main
Tax Department was established under the Cabinet of Ministers, and by 1994, this
department was transformed into the State Tax Committee and its territorial divisions were
established. This shows that in the first stage of transition to a market economy, attention
in tax policy was mainly focused on organizational aspects, i.e., introducing taxes and
forming relevant institutions directly implementing tax policy.

One of the main features of tax policy during this period was the greater emphasis on the
fiscal significance of taxes, i.e., more attention was directed towards forming state budget
revenues.

Today, the main directions for reforming our Republic's tax policy have been defined as:
further simplifying tax legislation, unifying taxes and other mandatory payments,
lightening the tax burden, liberalizing tax administration, stimulating increased efficiency
of resource use through tax instruments, and other directions.

In the process of improving the tax system in our Republic, it has been emphasized many
times that special attention must be paid to consistently reducing the tax burden on business
entities. In this, reducing the share of direct taxes levied on their incomes is of particular
importance.

As a result, by increasing the share of funds remaining at the disposal of enterprises, it

allows them to increase the amount of their working capital and maintain its optimal level,
invest more in modernizing production and increasing its efficiency, and further incentivize
employees' labor.

The trend of a stable decrease in their revenues relative to GDP also proves the
effectiveness of the policy of consistently reducing the tax burden on direct taxes. In
improving the tax system, priority importance is given to indirect taxation. While indirect
taxes are an addition to goods, they ultimately do not directly affect the financial condition
of the producer and do not hinder the development of production.

One of the important directions for improving the taxation system is regulating the tax
system, reducing the number of tax types, simplifying the calculation mechanism, and
reducing the payment frequency for them.

From the initial emergence of concepts that there is some limit to taxation to the present
day, the question arises: how much of the created value or received income should the state
take, and how much should remain with the taxpayer? Efforts are made to find the optimal
level of the tax burden, but so far, no precise conclusion has been reached on this matter.
If the state strives to maximize its revenues, taxpayers, on the contrary, try to minimize
their tax obligations and ensure that tax pressure does not limit their financial capabilities.
As the "fairness" of the state in tax collection weakens, the "honesty" of taxpayers also
continuously decreases. In modern statehood, most policymakers have already understood
this simple truth related to taxation. In this, the role of classical and modern scientific
concepts for optimizing the tax burden is immensely great.

Among modern scientific-theoretical concepts based on the classical principles of tax

optimization, the famous "curve" of the American economist Arthur Laffer holds a special
place.

A. Laffer depicts the quantitative relationship between the level of tax burden and budget
revenues in the form of a parabolic curve and concludes that tax revenues can be increased
not only when tax rates are raised but also when the tax burden is reduced to an acceptable
level.

An increase in tax rates up to a certain limit ensures a stable growth of tax revenues to the
state budget and their possible maximum level. Then tax revenues stop growing.

The range of tax rates that allows for a stable growth of tax revenues to the state budget
without stifling the economic activity of taxpayers, especially business entities, is
considered the "healthy zone" of taxation. After the marginal optimal tax rate that ensures
the possible maximum level of budget revenues, the "prohibited zone" of taxation begins.

Thus, when the tax rate reaches a certain level, business initiative dies, the desire to expand
production or continue it disappears, taxable incomes and, consequently, the tax bases
themselves shrink. Eventually, some taxpayers (those who find a way) move to the shadow
economy, while others cease their activities.

According to Laffer's theory, the heaviness of the tax burden leads to the development of
the shadow economy. In his opinion, the maximum level for taxing incomes should not
exceed 30%. Up to this rate, budget revenues increase. If 40-50% of incomes start to be
taken, i.e., if the tax burden level moves into the "prohibited zone," then population savings
shrink, and, in turn, interest in investing in the economy wanes, and tax revenues decrease.
Conversely, reducing the tax burden stimulates economic development.

After the optimal level of the tax burden, not only do the actual tax bases being taxed, i.e.,
formally declared incomes, decrease, but also the incomes that should actually be taxed but
are hidden from taxes decrease.

The brief essence of A. Laffer's concept is that the revenues of the state budget increase
not by increasing tax rates and the level of tax burden, but by expanding the tax bases.

The general patterns of taxation show that a broad tax base allows for a relatively lower
level of tax burden, while a narrow tax base, conversely, implies high tax rates. However,
high or low tax rates have different effects on the economic activity of taxpayers. A high
level of taxation leads to a deterioration of the country's economy and, accordingly, a
reduction in tax bases. This forces the state to further increase tax rates to meet its financial
needs. The increasing tax burden, in turn, reduces investments, and accordingly,
production, demand, and employment also shrink. Thus, the further narrowing of tax bases
continues, and tax revenues decrease. Heavy tax pressure, shrinking demand, rising
unemployment further disrupt the economy, interest in entrepreneurship is lost, the shadow
economy develops, the collectability of taxes decreases, and enterprises' tax debts increase.
The task of the state's economic policy is to prevent falling into such a negative situation
and, if such a situation has occurred, to ensure a way out of it.

However, modern financial research shows that a certain level of tax burden cannot be
considered equally acceptable for all economies. The level of tax burden found acceptable
in a highly developed economy may be burdensome for developing countries or countries
with transition economies. Therefore, the tax burden is assessed differently depending on
the level of the economy.

The level of the tax burden also depends on the chosen model of the market economy
development path. If a free market economy requires a lighter tax burden on business
entities, a socially oriented market economy is the opposite. Because the stronger the social
orientation of the market economy,

the more it necessitates an increase in state budget expenditures, which, in turn, creates the
need to increase the tax burden.

If we look at the macro-level tax burden indicators as the share of taxes in GDP for a
number of countries, indeed, the highest levels of tax burden can be observed in states with
a high level of social protection.

Among economically developed states, the highest levels of the macroeconomic tax burden
indicator are found in Scandinavian and Western European countries. In these countries,
the share of tax revenues in GDP is 40% and above. The reason for this is that precisely in
these countries, citizens' social protection is ensured at a high level, and high taxation levels
are observed alongside significant standard and variable social deductions from taxes.

It should also be noted that a high level of tax burden does not necessarily indicate that
strong social protection is in place in that state. High fiscality in a country may, on the
contrary, be due to a strengthened shadow economy in some states. Because the incomplete
accounting of types of economic activity, turnovers, incomes, properties, and other taxable
objects ultimately leads to a narrowing of the gross tax bases. A narrow tax base, as
mentioned above, requires high tax rates.

In states like Zimbabwe and Cuba, the level of tax burden is much higher than in some
countries with highly developed economies. Furthermore, from a comparative analysis of
tax burden levels across countries, it can be concluded that the tax burden indicator cannot
serve as a basis for assessing how developed economies are or the level of social protection
provided in countries. The level of this indicator is formed under the influence of the
specifics of countries' socio-economic policies, the state of their natural resources,
population density, geographical location, and a number of other factors.

So, what position does Uzbekistan hold in this regard? Is the tax burden level in our country
heavy or light? To answer these questions, we need to assess the tax burden indicator
reflecting the share of tax revenues in GDP in our country.

According to data from official statistical sources of our Republic, the macroeconomic tax
burden level over the years has been as follows.

Our Government has been implementing a number of measures year after year to optimize
the tax burden. As a result, as noted by our President, although the tax burden in the
economic sector was reduced from 20.5% to 20% in 2014, and the income tax rate was
reduced from 9% to 8%, the state budget was executed with a surplus of 0.2% relative to
the gross domestic product[35].

It can be observed that the tax burden level in our country has shrunk by more than half
compared to the initial period of independence. Comparing with other countries, it is visible
that this indicator is two times less than in a number of European countries, but significantly
higher than in states like Pakistan, Iran, Saudi Arabia, and Kuwait. Thus, it can be said that
the tax burden in Uzbekistan occupies a middle position among the international levels of
this indicator. However, the tax burden indicator we are comparing reflects only the ratio
of tax revenues, i.e., the state budget's tax revenues excluding targeted funds, to GDP in
Uzbekistan.

It is worth noting that for a full assessment of the tax burden in the economy, it is necessary
to include in the analysis not only mandatory payments named "tax" by the state but also
all mandatory payments that have the nature of a tax, regardless of their name, and, most
importantly, are recognized as "tax" from the taxpayers' point of view. From this
perspective, the tax burden level in our Republic is embodied in slightly different numbers.

The consolidated tax burden level was 30.6% in 2005 and constituted nearly 32% in 2013.
Thus, over the past decade, this indicator has had a tendency to increase. When the
consolidated tax burden level in Uzbekistan is compared with international indicators, it is
average for developed countries and above average worldwide.

35 Karimov I.A. By implementing fundamental structural changes in our economy in 2015,

consistently continuing the processes of modernization and diversification – opening a
wide path for private property and private entrepreneurship is our priority task. – T.:
Uzbekistan 2015.

Therefore, in this aspect, it can be concluded that Uzbekistan is in a normal position.

Although this indicator in our country is slightly above the 30% optimal level in the Laffer
concept discussed above, considering that social-character expenditures of the state budget
constitute nearly 60% of total expenditures, the tax burden level on the economy is not
very high.

However, in our opinion, the problem lies elsewhere. It is in the disproportionate (uneven)
distribution of the tax burden. The point is that the country's tax system, based on numerous
tax regimes, has led to a sharp difference in the tax burden levels of business entities. The
taxation of incomes of business entities under the generally established and simplified tax
regimes in our country is being implemented on the basis of various rates and is highly
stratified. For example, if in 2008 there were 20 different rates applied to incomes, this
number reached 22 in 2009, 24 in 2011, 27 in 2013, and 28 in 2015.[36]

Furthermore, there are two other categories of economic entities paying taxes under a
simplified procedure: business entities paying a fixed tax and agricultural enterprises
paying a single land tax.

Taxation of two categories of business entities engaged in certain types of activities

(temporary storage of motor vehicles, children's gaming machines) is carried out not
relative to their income or profit, but at fixed rates relative to physical indicators arising
from the nature of the activity.

Apart from the above two categories of taxpayers at fixed rates, physical persons engaged
in entrepreneurial activity without forming a legal entity, i.e., individual entrepreneurs, are
also taxed.

Individual entrepreneurs are taxed at fixed rates determined based on the type of activity
and the territory where the activity is carried out, regardless of the turnovers they have
carried out or the income received or profit/loss incurred.
36 [Link]. Problems of Optimizing and Proportionally Distributing the Tax Burden.
Business Expert. №11(95)

As we can see, the fixed tax itself generally operates in a stratified manner based on 42
different rates.

If we take into account both percentage and fixed rates together, we witness that in our
Republic, taxes are levied on the incomes of economic entities at over 70 rates combined
into various (more than 20) tax regimes.

Such stratification of the taxation system, of course, stems from the complexity of
determining the income of certain categories of business entities (fixed tax payers, trade
and public catering enterprises) and the necessity of incentivizing others through tax
instruments (small businesses and agricultural enterprises). However, this situation leads
to a deviation from the classical principle of "universality" of taxation, as well as from the
principles of "fairness of taxation" and "unity of the tax system" cited in the Tax Code.

In our opinion, for ensuring healthy competition in our national economy, the tax burden
must be distributed proportionally and fairly among economic entities. In the current state
of the Republic's tax system, this problem cannot be considered resolved to the necessary
extent. For this, the future directions of improving the Republic's tax system, as repeatedly
emphasized by our President, must be aimed at the issues of literal unification and
simplification of the taxation system.

It can be said that the main directions of tax policy, as a consistent continuation of the tax
reform strategy that has proven itself over the years, serve the further development of our
national economy.

In particular, in accordance with the Decree of the President of the Republic of Uzbekistan
PQ-2245 of December 22, 2015, "On the Forecast of Main Macroeconomic Indicators of
the Republic of Uzbekistan for 2016 and State Budget Parameters," the following changes
were introduced as the most important measures for further reducing the tax burden – the
basic rate of profit tax levied on legal entities was reduced from 8% in 2014 to 7.5% in
2015, and the rate of the second (lowest rate) scale of income tax levied on income of
physical persons was reduced from 8.5% in 2015 to 7.5% in 2016.

In the system of market relations, budget-tax policy also relies on its own principles. These
principles are as follows:

1. The principle of budget balance. This principle means that the state budget must be
balanced. The budget balance is achieved through the equality of budget revenues
and expenditures. If budget expenditures exceed revenues, a budget deficit arises. If
budget revenues exceed expenditures, a budget surplus appears.
 2. The principle of budget independence. This principle means that the state budget is
independent of other budgets. The independence of the state budget is ensured by
the fact that it has its own sources of revenue and independently determines the
directions of expenditures.
3. The principle of budget transparency. This principle means that the state budget
must be open and accessible to the public. The transparency of the state budget is
ensured by the fact that it is published in the press and discussed in parliament.
4. The principle of budget efficiency. This principle means that state budget funds
must be used effectively. The efficiency of the state budget is ensured by the fact
that it is executed according to plan and control is exercised over the use of budget
funds.
5. The principle of budget stability. This principle means that the state budget must be
stable. The stability of the state budget is ensured by the fact that it is adopted for a
certain period and changes are not made to it during this period.

The principles of budget-tax policy are important for ensuring the stability of the state
budget and the effective use of budget funds.

Control Questions and Assignments

1. What is the essence of fiscal policy?

2. What is the difference between discretionary and non-discretionary fiscal policy?
3. What are the main methods of financing the state budget deficit?
4. What are the main directions of tax policy in Uzbekistan?
5. What is the difference between direct and indirect taxes?
6. What is the essence of the Laffer curve?
7. What are the main principles of budget-tax policy?
8. What are the main directions of improving the tax system in Uzbekistan?
9. What are the main directions of budget policy in Uzbekistan?
10. What are the main directions of fiscal policy in Uzbekistan?

Topics for Reports and Independent Work

1. The role of fiscal policy in ensuring economic stability.

2. The role of fiscal policy in ensuring economic growth.
3. The role of fiscal policy in ensuring employment.
4. The role of fiscal policy in ensuring price stability.
5. The role of fiscal policy in ensuring the stability of the balance of payments.
6. The role of fiscal policy in ensuring the stability of the state budget.
7. The role of fiscal policy in ensuring the stability of the national currency.
8. The role of fiscal policy in ensuring the stability of the financial system.
9. The role of fiscal policy in ensuring the stability of the social sphere.
10. The role of fiscal policy in ensuring the stability of the economic system.