Federal Tax Arrears: Liquidity Problems,Federal Subsidies, or Regional Protection?

Abstract

Three hypotheses about the nature of federal tax arrears in Russia in the second half of the '90s are tested empirically. Tax arrears can be a result of: 1) liquidity problems in firms, 2) federal implicit subsidies, or 3) regional political resistance to federal tax collectors. Liquidity problems do not explain federal tax arrears: higher arrears were found in more liquid and more productive firms. For a given level of liquidity and size, firms had higher tax arrears in regions with better bargaining position vis-a-vis center, i.e. better political strength (measured by higher popularity of governors, worse relationships with center, higher regional share in total tax collections and lower transfers) and higher economic strength (measured by higher expenditure provision and per capita gross regional product). In addition, excessive employment earned firms higher tax arrears. The results are consistent with active regional resistance and explain why federal tax arrears accumulated faster than regional arrears.

JEL Classification: H26, H71