The Effect of Local Taxes on The Activities of Business Entities

The aim of this paper is to analyse the influence of local taxes (primarily property tax) on the functioning of business entities. Local taxes represent substantial components of local budget revenues and have implications for firms’ investment, production and employment decisions/choices. Despite common use of property taxes as a fiscal tool, their actual impact on business activity is still debated, leaving scope for empirical assessment with cross-country data.
This paper fills this gap by examining the response of fixed capital investment to changes in property tax rates. The analysis relies on official statistics of the Ministry of Economy and Finance, the State Statistics Committee, and the Tax Committee of Uzbekistan. Using descriptive analysis and regression methods, the study assesses the link between the tax rate on properties and the growth in investment.
Core to the empirical findings is that a decrease in property tax rates builds up the growth rate of one capital fixed. In particular, even a one percent reduction in the tax rate on property paid by firms may raise the rate of growth of fixed capital investments by as much as 4.35 percent. Nonetheless, this effect is statistically weak due to the high share of non taxable assets such as machinery and equipment in total fixed capital investments and the issue of property taxation on small business entities.
This indicates that tax incentives of property alone have a fairly small direct impact on investment activity. The local tax policy in the context of sustainable development should aim at the balance of appropriate intensity of tax burden and reliability of the local tax system with respect to generating stimulatory effects of tax policy on business development and investment activity in the region.