Principle of Tax Rate Equilibrium and its Application in the Tax System of the Republic of Armenia

Abstract

Currently, the tax rates in developing countries, including the Republic of Armenia, create a suboptimal burden for economic entities. From the state’s perspective, this situation also contributes to the issue of tax non-collection. This study may hold significant importance for other developing countries as well, as its primary objective is to determine the optimal tax burden on entrepreneurship through mechanisms for reducing tax rates. To achieve the set goal, general scientific methods were applied (analysis and synthesis, generalization, logical-structural, etc.). The article presents a methodological approach to assessing tax efficiency by analyzing comparative data on the burden of a unified tax rate and applying the principle of tax rate equilibrium. The application of the “50% Balance” principle is considered a key aspect of this research, which is fundamentally based on Arthur Laffer’s concept of the relationship between progressive taxation and government tax revenue, commonly known as the “Laffer Curve”. According to this concept, as marginal tax rates increase, there is a proportional expansion in the shadow economy due to increased tax evasion by taxpayers. This approach is based on the idea of achieving “maximum benefit” for both the state and business entities in the context of taxation. However, in this case, the most stable outcome is considered to be the minimal overall result from which neither side can gain more without changing the strategies of the other sides. Applying the stated principle, strategies were selected in the final stage of the research that correspond to the minimum values of overall benefit for each group of tax rates, such as “profit tax – Value added tax (VAT)”, “income tax – social contribution”, and “turnover tax”, where the state’s benefit is minimized compared to the benefit of the business entity, taking into account the shares of individual taxes in the tax revenues collected in the state budget