Estimating the effect of Progressive Personal Income Tax Schedule for Russia in a global CGE-OLG model

We employ a global overlapping generations model to estimate the effects of progressive taxation of personal income on the Russian economy. Individuals in the model are differentiated by age and skill level. We consider scenarios with three different degrees of steepness of the progressive tax schedule. Our findings are that higher taxation of high-skilled workers may cause them to reduce labor supply, which will negatively affect the long run economic growth. By 2050 the loss in GDP will amount to 0.3–1.2 percent and in consumption 0.6–2.0 percent depending on the steepness of the tax schedule. We show that low-skilled workers may suffer losses from the reduction in labor supply by high-skilled workers induced by the progressive taxation, which may exacerbate the problem of income inequality, in addition to the negative impact on the GDP. We find a significant positive spillover effect on economic activity in Russia from introduction of progressive taxation of personal income in other countries in the short and medium term. As labor supply decreases in the rest of the world, capital productivity falls and its flows into Russia. However, in the long run, a reduction in household income in the rest of the world leads to a cutback in their investment in the Russian economy. We compare the findings for Russia to result from a similar reform in the U.S. and find that sensitivity of developed countries with higher shares of income tax in the government revenue, such as the U.S., to the introduction of a progressive tax system is greater than in Russia.