Comparative Assessment of Regional Fiscal Capacity Calculation Approaches

Three basic methods are employed to assess the fiscal capacity of territories for fiscal equalization: the representative tax system method, the historical data method, and the macroeconomic indicator method. Each of these methods has its own advantages and disadvantages, while the historical data method is considered the most accurate in terms of approximation of the values of fiscal capacity to actual budget revenues. The aim of the article is to compare the accuracy of assessing Russian regions’ fiscal capacities through various methods, as well as by combining them, and to propose measures to change the current methodology for fiscal capacity assessment. The calculations presented in this article for the Russian regions for 2018 show that, in fact, the representative tax system and historical data methods have a comparable degree of accuracy, and the macroeconomic indicator method is only slightly inferior to them. At the same time, while assessing the fiscal capacity in regard to individual taxes, both the method of historical data and the method of representative tax system may have an advantage in the accuracy of the assessment, the method of macroeconomic indicators being inferior to them (except for the case of corporate income tax). As the author’s calculations show, it is possible to improve the accuracy of assessing regional fiscal capacity through the following measures: (1) not taking into account data for the current financial year, that is, taking into account data for only two reporting years; (2) not adjusting income tax and personal income tax fiscal capacity to the rate of tax revenue growth; (3) using the method of macroeconomic indicators for mineral extraction tax and other tax fiscal capacity.