The Impact of Taxes on Manufacturing Growth: The Case of Russia

Abstract

This article examines the impact of taxes on economic growth in Russia’s manufacturing sector. It argues that, given the growing role of manufacturing in national technological sovereignty, there is a pressing need for clearer insight into how taxes influence its development in the current context. The analysis covers the period from the early 2000s, when Russia recovered from the 1998 financial crisis, to the present, using statistical analysis based on linear and linearizable models. The research hypothesizes that statistical analysis at the international, national, and regional levels can reveal a negative effect of higher taxes on manufacturing growth. The findings largely confirm this hypothesis. At the international level, an analysis of the overall tax burden, measured as tax revenue as a percentage of GDP, showed no decisive effect on manufacturing performance. However, the picture changes when the analysis focuses specifically on taxes that directly reduce enterprise income such as the corporate income tax and social insurance contributions. Regression analysis of Russia’s manufacturing sector, and of individual regions with comparable economic potential and industrial specialization, shows that increases in these taxes over the given period negatively affected output and value added. However, the impact was not direct, but indirect, through a reduction in the investment resources of enterprises. Given the rising tax burden on corporate income in Russia, these findings suggest potential harm to manufacturing development and increased national risks. To mitigate these risks under successful budget consolidation, the study recommends lowering the corporate income tax rate to an internationally competitive level or replacing this tax with an alternative that is better suited to the modern digital economy.