When taxes in a country, particularly the desire to increase tax collection, become the key performance indicator of government activity

ArmInfo. The Armenian government has identified tax collection as its KPI (key performance indicator), for evaluating its activities. This is the viewpoint of Aghasi Tavadyan, an associate professor at the Armenian State University of Economics. He references the Laffer curve concept and emphasizes the necessity of developing a more balanced tax policy. 

Tax revenue trends (2018-2024)

According to him,  tax revenues to the state treasury of Armenia have shown significant growth since 2018.  Official data indicates, from June 2018 to June 2024, tax revenues rose from 1208.97 billion drams to 2306.05 billion drams (an increase of 90.7%). A  6.3% decrease was observed in 2020 due to the pandemic.  Despite this decline, the average annual growth rate from 2018-2024 was 15.7%, which is considerably higher than the average growth rate of 7.2% from 2014-2017. However, recent data suggests a slowdown in the pace of tax collection. In the first half of 2024, tax revenues increased by only 6.4% compared to the same period of the previous year. And this is a significant decrease from the double-digit growth seen in previous years. He attributes these figures to several factors. 

Tax Analysis

Thus, studying the dynamics of tax revenues for individual types of taxes, Tavadyan notes that the collection of indirect taxes, especially VAT and excise tax, has noticeably decreased. "Although some growth is still observed, the growth rate of tax collection is slowing down. This is worrisome, since indirect taxes usually reflect economic activity and consumption", he notes.  Compared to previous year, indirect taxes have decreased quite significantly. Of the main types of taxes collected, only income tax has not decreased. Income tax still shows an upward trend, but the growth rate has stabilized.  This may indicate a slowdown in wage growth or a slowdown in job creation. 

Revenues from other types of taxes - profit tax, turnover tax, value added tax, customs duty, have also decreased. 

The decrease in profit tax reflects the main problems in the country, in particular capital flight. "Armenia is currently experiencing capital outflow and a decrease in inflow", the economist reminds. 

Aghasi Tavadyan also recalls the special export duty on copper ore applied in 2021-2022. Although this has increased state budget revenues in the short term, it may have a negative impact on the development of the industry in the long term, he notes.

Gold transit factor

From November 2023 to May 2024, Armenia emerged as the primary transit country for Russian gold. 

According to the economist, 88.4% of gold exports from Russia passed through Armenia in the first three months of 2024. Precious and semi-precious stones and metals made up 76% of Armenia's total exports during this period.  However, at present the trend is on decline. 

"This emergency situation served as a temporary boost for the Armenian economy, but it also revealed hidden problems in other sectors of the economy. The volumes of traditional export goods have actually decreased, raising concerns about long-term economic growth", - Tavadyan notes.

State tax policy and its consequences

The government's strategy of using tax collection as a key performance indicator (KPI) initially produced positive outcomes.  This method proved effective in 2018, 2019 and 2020, as a large number of organizations emerged of the shadows and began paying income tax. 

However, this approach has now started to result in unforeseen consequences. 

In an effort to ensure further growth in tax revenues, the government resorts to introducing new types of taxes or increasing existing tax rates. 

For instance, as reported by "Hetk",  there are discussions on re-imposing the income  mortgage loans returns. Moreover, starting from 2025, the turnover tax will rise from 5 to 10 percent, and tax incentives provided to the IT sector are gradually being phased out.  Some of the tax incentives aimed at fostering the development of the IT sector were terminated at the beginning of 2024, with more scheduled for cancellation in 2025. The expert is sure that this approach could have negative consequences. The famous Laffer curve concept in economics illustrates that a continual increase in the tax burden beyond certain threshold can lead to a decrease in tax revenues. This is because high taxes may encourage  the growth of shadow economy or dampen economic activity. 

Conclusion

The current tax policy has a significant impact on the Armenian economy, Capital flight and reduced investment are a serious problem for the country's economic growth, the expert notes. 

An analysis of the tax system and tax collection in Armenia reveals serious problems. The slowdown in tax revenue growth, the decline in indirect tax collection and capital outflow indicate the urgent need to review the current tax policy.  While introducing new taxes or raising existing tax rates may provide short-term revenue, it could impede long-term economic growth and investment attraction. 

Tavadyan recommends focusing on the IT sector, as abolishing tax incentives could lead to an exodus of specialists and reduce industry competitiveness. 

"To ensure sustainable economic growth in the future, more balanced tax policy should be developed. It should not only aim increasing tax revenues, but also  improving the business environment, stimulating investment and diversifying the economy. 

It is also necessary to take into account external factors, such as the transit of capital and gold from Russia, which temporarily improved economic indicators. However, such external factors should not distract attention from the need for long-term sustainable development. Finally, it is important to continue monitoring the effectiveness of the tax system and respond flexibly to changes in the economic situation. 

Only in this way will Armenia be able to overcome current challenges and ensure long-term economic growth and prosperity", - summarizes Aghasi Tavadyan.