Industrial City Development under the Influence of Local Taxation
Розглянуто основні проблеми промислового міста, проаналізовано моделі, використовані при вивченні функціонування системи міста; побудовано модель розвитку промислового міста під впливом місцевого оподаткування; розраховано основні показники розвитку міста і запропоновано рекомендації щодо формування...
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| Опубліковано в: : | Економіка промисловості |
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| Дата: | 2012 |
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| Формат: | Стаття |
| Мова: | Англійська |
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Інститут економіки промисловості НАН України
2012
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| Назва журналу: | Digital Library of Periodicals of National Academy of Sciences of Ukraine |
| Цитувати: | Industrial City Development under the Influence of Local Taxation / Yu.O. Petrenko // Економіка пром-сті. — 2012. — № 3-4. — С. 43-63. — Бібліогр.: 29 назв. — анг. |
Репозитарії
Digital Library of Periodicals of National Academy of Sciences of Ukraine| _version_ | 1859615051245158400 |
|---|---|
| author | Petrenko, Yu.O. |
| author_facet | Petrenko, Yu.O. |
| citation_txt | Industrial City Development under the Influence of Local Taxation / Yu.O. Petrenko // Економіка пром-сті. — 2012. — № 3-4. — С. 43-63. — Бібліогр.: 29 назв. — анг. |
| collection | DSpace DC |
| container_title | Економіка промисловості |
| description | Розглянуто основні проблеми промислового міста, проаналізовано моделі, використовані при вивченні функціонування системи міста; побудовано модель розвитку промислового міста під впливом місцевого оподаткування; розраховано основні показники розвитку міста і запропоновано рекомендації щодо формування системи місцевого оподаткування в промисловому місті.
Ключові слова: місцеве оподаткування, модель розвитку міста, промислове місто.
Розглянуто основні проблеми промислового міста, проаналізовано моделі, використовані при вивченні функціонування системи міста; побудовано модель розвитку промислового міста під впливом місцевого оподаткування; розраховано основні показники розвитку міста і запропоновано рекомендації щодо формування системи місцевого оподаткування в промисловому місті.
Ключові слова: місцеве оподаткування, модель розвитку міста, промислове місто.
The Ukrainian economy will not be able to take a worthy place in the world’s economic space without the solution of problems concerning effective industrial production development. Functioning in the framework of the state industrial policy, industrial city has to be given certain economic levers and financial resources to address its own problems at the local level. One of the most powerful economic levers is taxation, which at the city level is represented by an institute of local taxation. The hypothesis of the research is that in an industrial city, which has its peculiar problems and features of development, it is possible to achieve an increase in tax revenues and economic growth in a certain time interval at the expense of tax policy changes at the local level. Taking into account the hypothesis of the research, considering existing city models and institutional peculiarities of Ukraine, a system-dynamic model of industrial city development under the influence of local taxation is proposed, developed in the framework of neoclassical economic theory. The modeling object is industrial Donetsk city. The model includes industrial city problems such as the shortage of investment resources, that has a negative influence on availability of fixed assets, and through them to production output, as well as environment in the form of pollutant emissions into atmospheric air, which has a direct negative impact on the health status of population, life expectancy, and therefore human capital as a factor of economic growth. Three taxes are suggested forming the local taxation system: industrial enterprises income tax, environmental tax on pollutant emissions into atmospheric air from stationary sources of pollution, and personal income tax. The results of economic-mathematical modeling confirm the fact that the presence of significant tax levers at the local level and the possibility of their application for regulation of economic development contribute to the growth of socio-economic indicators of the city.
Keywords: local taxation, city development model, industrial city
|
| first_indexed | 2025-11-28T18:13:02Z |
| format | Article |
| fulltext |
–––––––––––––––––––––– Економіка промисловості Экономика промышленности ––––––––––––––––––––––
ISSN 1562-109X 43
2012, № 3-4 (59-60)
УДК 336.22:352 Yuliya Olexandrivna Petrenko
Institute of Industrial Economics, Donetsk
INDUSTRIAL CITY DEVELOPMENT
UNDER THE INFLUENCE OF LOCAL TAXATION
Introduction
The Ukrainian economy will not be able
to take a worthy place in the world’s economic
space without the solution of problems concern-
ing effective industrial production development.
The production facilities of Ukraine are concen-
trated in industrial cities, where the lack of in-
vestment resources leads to exploitation of obso-
lete fixed assets at the industrial enterprises with
a high degree of physical deterioration and natu-
ral environment pollution, which negatively af-
fects the health status of population, fertility and
mortality rates, life expectancy. Functioning in
the framework of the state industrial policy, an
industrial city has to be given certain economic
levers and financial resources to address these
problems at the local level. One of the most po-
werful economic levers is taxation, which at the
city level is represented by an institute of local
taxation.
Forming an effective and self-sufficient
local taxation system is one of the main tasks of
Ukrainian tax system improvement. Nowadays
the collection of local taxes and fees is regulated
by the Tax code, with the introduction of which
the situation in the sphere of local taxation has
not significantly changed: the code does not
provide for the significant sources of tax reve-
nues and the levers of influence on socio-
economic development at the local level. The
scientific interest is how to form the local taxa-
tion system, appropriate for use at solution of
problems of territories, in particular industrial
cities.
Industrial city problems
Problems of industry rise acute in the
places of its concentration – industrial cities,
which act as territorial-economic complexes.
Let’s consider the main problems of industrial
cities in Ukraine by the example of Donetsk
city.
In recent years, 65-70% of the city in-
vestments in production (non-environmental)
fixed assets and 90-95% of the investments in
environmental fixed assets have been carried out
at the expense of the own funds of enterprises
[1-4]. Attracted investments in industry has been
not enough to change the situation with obsoles-
cence and physical deterioration of industrial
fixed assets – the wear rate of the fixed assets in
industry in Donetsk city over 2005-2010 has
been approximately 55% [5, 26-27]. A trend
towards a fall in investment financing has made
it impossible to improve the situation – the de-
cline of investment activity and the resulting
decline in the value of fixed assets in industry
has been tracing over the recent few years [5]. In
the city, where industrial enterprises are city-
forming, such a situation is threatening taking
into account the prospects of socio-economic
development.
Another problem is derivative from the
previous one. Through the domination of metal-
lurgical, fuel-energy and chemical industries
with the use of physically worn out and obsolete
fixed assets in the production process there is an
issue of pollutant emissions into atmospheric air
from stationary pollution sources in the city. In
recent years, pollutant emissions have de-
creased, remaining one of the largest in the
country [2]. Although mentioned decrease was
not the result of environmental activities of in-
dustrial enterprises, but it was connected with
the closure of certain productions and work-
shops [6]. According to the results of the con-
ducted research, a high level of pollutant emis-
sions has a negative impact on the health status
of residents, fertility and mortality rates, life
expectancy [7]. When the rapid transition of in-
ПРОБЛЕМИ СТРАТЕГІЇ РОЗВИТКУ ТА ФІНАНСОВО-
ЕКОНОМІЧНОГО РЕГУЛЮВАННЯ ПРОМИСЛОВОСТІ
© Y.O. Petrenko, 2012
–––––––––––––––––––––––––– Економіка промисловості Economy of Industry ––––––––––––––––––––––––––
44 ISSN 1562-109X
2012, № 3-4 (59-60)
dustry of the city (and the country as a whole) to
a higher technological level seems to be imposs-
ible, it becomes obvious that the increase of in-
vestments in the non-environmental fixed assets
(production facilities) will lead to the increase of
pollutant emissions into atmospheric air. At this
stage, taking into account the institutional pecu-
liarities of Ukraine, the atmospheric air pollution
restraining as a negative externality can be car-
ried out by the application of the "end of pipe"
way [8, 235] through the direct financing of in-
dustrial enterprises or urging them to finance
cleaning measures for their own account, in fu-
ture combining this strategy with others,
founded on partnership and a voluntary basis [9,
24-26].
The structure of financing of the enter-
prises capital needs in the market economy con-
sists of self-financing, external or attracted funds
and state support, and in conditions of crisis the
share of self-financing and state support grows-
ing, and the share of borrowed funds declines
[10, 22-24]. High level of self-financing with the
active regulatory intervention of the state in
economic process is the basis of the industry
development of Ukraine at the present stage1
[10, 6]. Regulatory intervention is conditioned
by the industrial policy of the state, aimed at
changing the industrial structure in the direc-
tions, which, in hopes, have the best prospects
for economic growth than in the conditions of
market equilibrium2 [11, 7]. However, function-
ing in the framework of the state industrial poli-
cy, industrial city must be guaranteed by certain
set of economic levers and financial resources
for the solution of the tasks set before it. One of
the most powerful economic levers is taxation,
which at the level of a city is presented in the
form of local taxation.
1 Long-term bank loans remain difficult to
access for industrial enterprises through the high rate
of interest, and investors do not risk investing in the
industry with a high degree of fixed assets deteriora-
tion and long payback period, despite the presence of
finance sources, because they prefer branches of
economy with fast turnover of capital.
2 To support government intervention R. Mus-
grave stressed that private market can not ensure jus-
tice between generations, and government should do
it [15, 153].
Proposed tax solution
The foundation of local taxation and local
finance in general is based on the theory of fis-
cal federalism, developed by R. Musgrave
(1959) and W. Oates (1972), that considers the
problems of the allocation of public sector func-
tions between different levels of government,
including the provision of local public goods
and services through the application of the me-
chanism of local taxation [12, 4]. In accordance
with the principle of tax autonomy, local taxes
should cover at least a half of local expenditures
[13, 16]. One of the main principles of fiscal
federalism is the principle of fiscal equilibrium,
proposed by M. Olson, according to which the
expenditures and corresponding revenues must
be in the competence of one and the same au-
thority [14, 482-483]. If we consider local taxa-
tion as a response to the need of meeting local
needs, the use of a separate local taxation system
by each community is quite reasonable, because
there are no two absolutely identical local com-
munities. In OECD countries fiscal federalism is
considered in the aspect of tax competition of
different territorial communities, which have the
authority to set their own taxes and fees. Taking
into account the fiscal policy at the local level,
physical and legal persons choose an acceptable
set of public services and their payments in the
form of local taxes, moving from one communi-
ty to another [16].
In Ukraine the process of choosing local
communities by residents and businesses is un-
der the influence of the factors other than tax
factor, because there are no significant differ-
ences in taxation at the local level. According to
the norms of tax legislation, local taxes include:
tax on immovable property, other than land plot,
single tax, fee for parking vehicles, fee for im-
plementation of certain types of entrepreneurial
activities, tourist fee [17]. In Donetsk city in
2011 local taxes and fees amounted to 3% of the
local budget tax revenues [18], that indicates the
weakness of the fiscal function implementation
by the local taxation in the industrial city. Con-
cerning a regulatory function of the local taxa-
tion, local self-government bodies have the right
to a slight change of tax rates within the limits
established by the Tax code, and the provision
of benefits on the fee for parking vehicles and
tourist fee (the received benefit sums have not
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ISSN 1562-109X 45
2012, № 3-4 (59-60)
been earmarked) [17]. It is obvious that the
regulatory action of such benefits does not have
a significant impact on the functioning of the
local economic system. Thus, the local taxes and
fees, which according to the Tax code of
Ukraine are the own revenues of local budgets,
does not perform fiscal and regulatory functions
to the extent possible to make a significant in-
fluence on forming the city budget or regulating
the economic agents’ behavior.
In this context the relevant question is
how to enable both functions of taxation on the
city level with a view of achieving the desired
level of economic growth and increase social
welfare from a utilitarian point of view1, which
requires municipal authorities having sufficient
tax powers at the local level. Depending on the
functional feature of the city it is expedient to
explore the possibility to transfer the relevant
taxes and fees with granting them the status of
local to the competence of municipal authorities
considering the characteristics of the city eco-
nomy. In an industrial city such taxes may be
personal income tax, corporate income tax in
part of industrial enterprises (or industrial enter-
prises income tax) and environmental tax on
pollutant emissions into atmospheric air from
stationary sources of pollution, which are appli-
cable at the local level in different countries of
the world2.
Because of the complexity of real experi-
ment and unpredictability of its consequences,
when studying the influence of local taxation on
the city development as a complex economic
system scientists usually use such a tool of eco-
nomic analysis as modeling. Let’s consider the
models, suitable for application during the study
of the city development depending on the tax
policy at the local level.
1 Taking into account institutional peculiari-
ties of Ukraine, at first it is expedient to explore the
ways of maximizing social welfare of local commu-
nity inhabitants in whole and only after attainment of
this condition move to a single inhabitant.
2 In Ukraine, according to the norms of the
Tax code, proposed taxes are national taxes [17]. In
accordance with the Budget code their tax revenues
are divided between the state budget and local budg-
ets of different levels due to the established propor-
tions [19].
Existing city models – a brief analysis
Three main types of models are usually
used for the study of tax policy at the local level
[20]:
(1) an open economy with mobile house-
holds;
(2) an open economy with mobile house-
holds and firms;
(3) a closed economy with households
and firms.
An open economy with mobile house-
holds is the usual Tiebout’s framework of small
open communities with mobile residents, but
without enterprises (firms) [21]. The main as-
sumptions of the model are the full mobility of
inhabitants (consumer-voters), their full aware-
ness, a large number of communities, indiffe-
rence to employment opportunities (residents
receive income from dividends), and the limita-
tion of community size (the existence of an op-
timal community size and the desire of local
authorities to achieve it and to keep). Local taxa-
tion is considered as a price of a public good
like a regular price of goods and services in the
private market, and migration costs are also tak-
en into account as a fixed restraining factor in
decision making about moving to another com-
munity: "Just as the consumer may be visualized
as walking to a private market place to buy his
goods, the prices of which are set, we place him
in the position of walking to a community where
the prices (taxes) of the community services are
set" [21, 422]. If production functions show
constant returns to scale, and if indifference
curves are regularly convex, the optimal solution
is possible. But Tiebout’s hypothesis may not be
considered as really true under existing condi-
tions because of limited competition and com-
munities’ decision-making concerning local
public goods on the basis of political processes.
The model of an open economy with mo-
bile households and firms is applied for the
study of tax policy in a particular city. The gen-
eral equilibrium static model of an open city
economy may be an example [20]. Tax
revenues, joined with exogenous grants (grants-
in-aid), are used to purchase a single pure public
good (G), by which the infrastructure of the city
is meant, and which benefits households and
firms within the city. Aggregate output of a
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46 ISSN 1562-109X
2012, № 3-4 (59-60)
common consumption good produced within the
city (X) is defined by using the Cobb-Douglas
production function with factors such as land
(L), endogenously provided all-purpose public
good (G), and a composite input, computed by
production function with constant elasticity of
substitution (CES), consisting of the cost of la-
bor (resident workers (N) and non-resident
commuter managers (M)) and capital (K). The
model is designed to determine the local taxa-
tion influence on the working place choice for
workers and the area of the location choice for
firms. Questions inherent in the solution of in-
dustrial city problems are not considered in the
research.
The model of a closed economy with
households and firms implies the presence of
both the households and enterprises in a city
without possibility to move beyond city bounda-
ries. The third approach is the most suitable for
the study of fiscal policy in a large city with
suburbs. According to this approach the city
economy is presented as a dynamic model of a
typical American city, focused on the analysis of
the evolution of the urban territory [22]. The
object of research is the city as a closed system.
In accordance with the author of the model, the
founder of a system dynamics method
J. Forrester, system within certain limits should
be able to generate any situation for analysis.
Through a number of assumptions inherent in
typical American cities (in particular the method
of population, housing fund and enterprises
grouping, the peculiarities of local taxation and
others) forming a local taxation system in
Ukrainian city on the principles presented in
research [22] is not possible, however, the con-
ceptual approach to the modeling of a city sys-
tem, introduced by J. Forrester, is suitable for
use in modern conditions of Ukrainian city.
In the above models the main attention of
scientists was given to attempts of solving the
problems of the city development, taking into
account social and economic processes, exclud-
ing the role of the city in the natural system. In
particular J. Forrester claims that any separate
city is small enough to influence the environ-
ment [22, 25]. Nowadays we cannot agree with
this view at a city. In the model of the world
D. Meadows addressed environmental problems
at the forefront in solving the issue of mankind
going out of the planet natural limits [8]. To
construct a model of the influence of local taxa-
tion on the industrial city development it is ap-
propriate to take into account the scientists’ ex-
pertise on the modeling of the environmental
component of the territories development.
One of the latest Ukrainian scientists’ re-
searches, devoted to the modeling of the indus-
trial city, provides the model for developing the
territorial economy scenarios, taking into ac-
count the ecological factor, and selection of the
best option [23]. In the model the city is
represented by the combination of the reservoirs
that determine the processes of local develop-
ment, as the enterprises fixed assets (average
annual cost of fixed assets with the division on
the enterprises fixed assets and environmental
funds), engaged in production (the average
number of employed at the enterprises) and en-
vironmental pollution. To choose the develop-
ment strategy two target values are used – pro-
duction output and mortality rate, and also one
regulation tool is used – rate of investments dis-
tribution between investing in fixed assets and
environmental funds. Production output in the
model is estimated in terms of production func-
tion with constant elasticity of substitution
(CES). Issues of taxation and tax policy are not
considered in the research, but employed model-
ing approaches on the basis of the method of
system dynamics, determination of the main
reservoirs, city development indicators, and op-
timization criteria are suitable and can be ex-
tended and applied for the modeling of the local
taxation influence on the development of an in-
dustrial city.
In one of the latest research works of our
country’s scientists, devoted to the impact of
taxation on industrial activity, tax regulation by
environmental taxes is considered in detail at the
state level [24, 312-332]. With a view of study-
ing the regularities of environmental taxation
influence on the activity of industrial enterprises
in Ukraine (in the form of the industrial produc-
tion output), the author proposed a model of tax
ecological regulation of the industrial enterprises
activity with the account of environmental factor
and state regulation in the form of levying an
environmental tax on industrial enterprises. The
model considers one of the most acute problems
of Ukraine as a whole and industrial city in par-
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ISSN 1562-109X 47
2012, № 3-4 (59-60)
ticular – atmospheric air pollution by pollutant
emissions. The industry activity is estimated in
terms of Cobb-Douglas production function with
the neutral technical progress. A model of the
industrial activity regulation by environmental
taxation is built for Ukraine as a whole, but the
approach to the environmental taxation can be
applied at the local level.
The analysis of models shows that each of
them has disadvantages, which do not allow ap-
plying them for the solution of the research tasks
in given economic setting. The fundamentals of
the models [20; 21; 22] do not correspond to the
conditions of taxation and institutional peculiari-
ties of Ukraine; in addition, they do not include
the environmental component of the city devel-
opment. In research [20] the target function is
the inhabitants’ utility function, which is diffi-
cult to measure in practice. In the model [23]
taxation is not included, therefore, the regulation
by tax levers is not provided. In the research
work [24, 312-332] the model of environmental
taxation influence on economic development at
the state level is given. In connection with the
above, there is a need to develop a new model of
the local taxation influence on the industrial city
development that corresponds to the conditions
of Ukraine and is suitable for application in
practice.
Building the model
The hypothesis of the research is that in
an industrial city, which has peculiar problems
and features of development, it is possible to
achieve an increase in tax revenues and econo-
mic growth during a certain time interval at the
expense of changes in tax policy at the local
level.
Taking into account the hypothesis of the
research, considering the institutional peculiari-
ties of Ukraine, the model of industrial city de-
velopment under the influence of local taxation
is proposed, developed in the framework of
neoclassical economic theory. The model in-
cludes industrial city problems such as the
shortage of investment resources that has a
negative influence on availability of fixed assets,
and through them to production output, as well
as environment in the form of pollutant emis-
sions into atmospheric air that has a direct nega-
tive impact on the health status of population,
life expectancy, and therefore human capital as a
factor of economic growth.
The simulation object is industrial Do-
netsk city. The scientific interest lies in the study
of local taxation influence on city development.
The model is an improvement and adapta-
tion of the proposed in [23; 24, 312-332] models
to the objectives set in the study, and coming out
of following assumptions.
(1) The city is presented as an economy
system of a closed type with a feedback, as in
research [22]. The impact of exogenous factors
on the system is eliminated.
(2) The value of products, services and
works sold (hereinafter – products sold) in the
city is considered to be the analogue of the city’s
gross domestic product (hereinafter – GDP) (the
analogy is based on the fact that the growth of
GDP depends on the growth of production out-
put if resources remain unchanged within a cer-
tain time interval); investment distribution be-
tween investments in production fixed assets
and environmental fixed assets is introduced on
the basis of a coefficient; environmental fixed
assets are not introduced into production func-
tion, because they are not a factor of production,
and they are involved in the process of pollutant
emissions cleaning and the reduction of produc-
tion harmful impact on the environment, as in
research [23].
(3) The value of industrial products sold
is represented by Cobb-Douglas production
function; capital is given as the average annual
value of fixed assets in comparable prices; it is
assumed that the current funds in necessary
amount are provided by financial system that is
not considered; environmental pollution is
represented in the form of pollutant emissions
into atmospheric air from stationary sources of
pollution, as in the research [24, 312-332].
(4) With a view of introducing a realistic
restraining effect, a fixed factor is given in the
form of a distribution of workers between indus-
trial and non-industrial sectors of the city, as in
scientific study [21, 419].
(5) The number of employees depends on
city inhabitant quantity, as in the research [25].
In addition, an assumption of the free labor exis-
tence is introduced.
(6) A part of city inhabitants works and
receives a salary, another part do not work and
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48 ISSN 1562-109X
2012, № 3-4 (59-60)
receive social assistance that in the model is
considered to be exogenous factor and is not
separately indicated (assistance from the state
budget and extra-budgetary funds); the popula-
tion distribution according to age identity and
elasticity of choice between work and leisure is
not considered, as in the scientific study [20].
The assumptions that distinguish the pro-
posed model from other existing models consist
of the following.
(7) The model is designed for the analysis
of the local taxes and fees influence on the in-
dustrial city development. The idea is put for-
ward to use as local taxes the taxes that form the
basis of local budget revenues, have the greatest
impact on investment activity in the city and
reduction of negative externalities, which for
industrial city are represented in the form of en-
vironmental pollution. Three taxes are suggested
to form the local taxation system:
1) industrial enterprises income tax1 with
the possibility of the provision of earmarked
investment tax benefit, which remains at dispos-
al of industrial sector enterprises in order to fund
raising for increasing the fixed assets value, in-
cluding environmental fixed assets;
2) environmental tax on pollutant emis-
sions into atmospheric air from stationary
sources of pollution, which reflects the relation
of pollutant emissions into atmospheric air with
the receipt of investments in the capital of envi-
ronmental protection, with the possibility of
providing earmarked environmental tax benefit
to industrial sector enterprises in order to fund
raising for increasing the environmental fixed
assets value;
3) personal income tax as the main source
of local budget forming that depends on the
change in the number of employees and their
wages.
Other taxes and fees, as well as govern-
mental and intergovernmental transfers, are not
considered.
1 It is a tax on operating income of enterprises
of extractive and processing industries, production
and distribution of electricity, gas and water [26] – a
similar approach is used in the Tax code for tax ex-
emption of certain industry income (light industry,
shipbuilding industry, etc.) [17].
(8) Reflection of processes that influence
on city’s socio-economic development in the
model is based on the use of production function
(production output in industrial and non-
industrial sectors is represented by Cobb-
Douglas production function), and the city is to
a certain extent modeled under physical laws.
Therefore, the task to trace the use and alloca-
tion of received tax revenues does not apply.
(9) The economy of the city is divided in-
to three sectors: a population sector, industrial
sector and non-industrial sector; a block of local
taxation is introduced separately (Fig. 1)2. In
addition, the block of city’s functional indices is
calculated in the model. The industrial sector
includes enterprises of extractive and processing
industry, as well as those, the main economic
activity of which is production and distribution
of electricity, gas and water [26]. Other enter-
prises are operating in non-industrial sector.
Population sector. For population indica-
tor the average number of city resident popula-
tion is taken that grows with the increase in the
number of born and reduces with the increase in
the number of dead in a given year. In the model
the harm to the health of industrial city popula-
tion caused by atmospheric air pollution is
measured in value terms referring to as second
expenditure category proposed in [7, 5], namely
as lost profits in the form of underproduction of
GDP due to premature death or disability to
work.
In industrial sector industrial capital and
labor cooperate; the result of their cooperation is
the industrial production output. It is assumed in
the model that the value of products sold is
equal to the production output. Investments de-
pend on the gained profit and the value of indus-
trial products sold in the current year. Invest-
ments are allocated to two destinations: capital
2 The link between local taxation and city
population in Fig. 1 is shown with a dashed line, be-
cause taxes in the model do not have a direct impact
on population, but considered to be one of the criteria
for city’s socio-economic development, on which the
welfare of the inhabitants and providing them with
social services according to the utilitarian function of
public welfare [27, 488-489] depends, and their
amount is taken into account in the model as one of
the criteria of social welfare.
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ISSN 1562-109X 49
2012, № 3-4 (59-60)
Fig. 1 Causal scheme of the model of local taxation influence on industrial city development
investments in environmental and production
fixed assets. Investments to environmental fixed
assets reduce pollution of atmospheric air from
stationary sources of pollution. According to the
assumption of the model, based on statistical
data available [2], pollutant emissions into at-
mospheric air are only carrying out by enterpris-
es of the industrial sector. The average number
of regular employees in industrial sector is de-
termined on the basis of needs in the mainten-
ance work on fixed assets, and is introduced into
the model by the formulas of increase or de-
crease in the number of employees. In addition,
the number of employees disabled to work year-
long through pollution of the atmosphere is not
introduced into production function. Losses
from underproduction of GDP grow subject to
an increase in the level of temporary disability
to work due to air pollution.
Non-industrial sector (production of
which may or may not have a material embodi-
ment, but also has its cost, as services in the
spheres of health, education, trade, etc.) pro-
vides city development along with industrial
sector, they co-exist within a single territory and
complement each other. Modeling of the non-
industrial sector is carried out by the analogy
with industrial, but it is simplified, given the
research focusing on industrial sector.
Local taxation block consists of three of-
fered local taxes with the mechanism of tax ben-
efit granting. Tax rates, used in the model, are
not nominal but effective (actual norms in con-
sideration of tax benefits, overpayments, debts,
etc.).
Functional indices of the city include the
value of products sold, the value of fixed assets,
the fixed asset investments, the number of regu-
lar employees and temporarily disabled to work
through the atmospheric air pollution in the city,
calculated as a total result of activities in indus-
trial and non-industrial sectors all together.
On the basis of data describing the devel-
opment of Donetsk in 2005–2010, the system-
dynamic model of industrial city development
under the influence of local taxation is built,
with the help of which a forecast for the next 15
years (from 2011 to 2025) is made. The length
of the simulation period is 1 year; [1, ]t n , t –
the number of simulation period. The time hori-
zon n = 21, and consists of the basic interval
(2005–2010), on the basis of which the conclu-
sion about model reliability is drown, and the
forecast interval (2011–2025).
The city development is described in the
form of economic-mathematical model with the
use of system dynamics methods that allows
tracing changes in the system under the influ-
ence of local taxation. System dynamics is ap-
plied when there is no need or opportunity to
study the impact of individual objects, and it is
sufficient to determine a system behavior at the
level of aggregated values. All the indicators
and processes are represented in the form of in-
terrelated indicators computed with the use of
tools, such as the "stocks" and "flows" between
them [28, 54]. The model is formalized in the
form of a differential equations system and im-
plemented in the Powersim software environ-
ment (Fig. 2). The legend of the main indicators
is given in table 1.
Industrial sector
+ +
Non-industrial
sector
Local
taxation +
+
+ +
+
– –
Population sector
al
ph
a
A_
I
Ta
x_
L_
N
R
at
e_
S_
N
B
D
R
at
e_
B
R
at
e_
D
L_
S_
I
R
at
e_
K_
D
_N
L_
S_
N
L_
N
_F K_
N
ga
m
m
a
e
K_
I
t
R
at
e_
D
_P
at
m
D
_P
at
m
PR
Y
A_
N
L
P
R
at
e_
K_
U
_N
be
th
a
I_
K_
I
C
_M
t
R
at
e_
tim
e
t
R
at
e_
L
L_
I_
F
R
at
e_
S_
I
L_
S_
N
L_
S
R
_K
_I
nd
R
_K
_N
at
L_
N
L_
I
I_
K_
N
I
I_
K_
I
Ta
x_
PR
R
at
e_
PR
Pa
tm
PR
_B
I_
K_
N
at
t
Ta
x_
L
Ta
x_
L_
I
R
at
e_
L_
Lo
c
Pa
tm
_Y
_I
Ta
x_
PR
_I
nd
Pa
tm
_B
Ta
x_
Pa
tm
W
_F
_N
W
_N
Ta
x_
Pa
tm
_I
nd
Ta
x_
PR
_I
nd
t
Lo
ca
l_
Ta
xe
s
W
_F
_I
Ta
x_
L_
IR
at
e_
L_
Lo
c
W
_I
Y_
I
R
at
io
_Y
_I
R
at
io
_P
at
m
D
L_
Pa
tm
D
L_
Y_
I R
at
e_
K_
U
_I
Pa
tm
_C
_M
C
E_
L_
N
E_
L_
I
L_
L_
I
K
K_
N
L_
L_
N
m
u
Y_
N
Ta
x_
Pa
tm
_I
nd
I_
K_
In
d
R
at
e_
I
R
ev
en
ue
s
R
_K
_N
et
a
R
at
e_
N
D
L_
K_
N
L_
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N
at
D
L_
K_
I
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at
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K_
D
_I
R
at
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Pa
tm
_B
R
at
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tm
K_
In
d
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at
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d
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at
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at
K_
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at
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as
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G
ra
ph
_P
R
_BR
at
e_
PR
_B
Fi
g.
2
T
he
fl
ow
ch
ar
t o
f D
on
et
sk
c
ity
d
ev
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op
m
en
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nd
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th
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in
flu
en
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im
so
ftw
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ro
nm
en
t
–––––––––––––––––––––––––– Економіка промисловості Economy of Industry ––––––––––––––––––––––––––
50 ISSN 1562-109X
2012, № 3-4 (59-60)
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ISSN 1562-109X 51
2012, № 3-4 (59-60)
Table 1
The main indicators of the model of local taxation influence on industrial city development
Indicators Designation
Stocks of the model
Average annual number of resident population in the city, thousand pers. P
Average annual value of production and environmental fixed assets in industrial
sector, respectively, mln. UAH
K_Ind,
K_Nat
Average annual value of fixed assets in non-industrial sector, mln. UAH K_N
Average number of regular employees (not including temporarily disabled to work
through atmospheric air pollution from stationary sources) in industrial and non-
industrial sectors, respectively, thousand pers.
L_I,
L_N
Local tax revenues, mln. UAH Local Taxes
Flows with the tempo
Number of born, thousand pers./year B
Number of dead, thousand pers./year D
Investments in production and environmental fixed assets in industrial sector, re-
spectively, mln. UAH/year
I_K_Ind,
I_K_Nat
Variables and constants
Production output in the city, industrial, and non-industrial sectors, respectively,
mln. UAH
Y,
Y_I, Y_N
Before-tax operating income of enterprises in industrial sector, mln. UAH PR
Investment tax benefit rate (tax benefit rate of industrial enterprises income tax) Rate_PR_B
Proceeds from industrial enterprises income tax, mln. UAH Tax_PR_Ind
Average annual value of fixed assets (fixed capital) in the city, mln. UAH. K
Number of employees disabled to work yearlong through the pollutant emissions
into atmospheric air from stationary sources of pollution in the city, industrial and
non-industrial sectors, respectively, thousand people
L_S,
L_S_I,
L_S_N
Average number of employees in the city, thousand people L
Proceeds from personal income tax in the city, industrial and non-industrial sectors,
respectively, mln. UAH
Tax_L,
Tax_L_I,
Tax_L_N
Pollutant emissions into atmospheric air from stationary sources of pollution, thou-
sand tons Patm
Environmental tax benefit rate (tax benefit rate of environmental tax on pollutant
emissions into atmospheric air from stationary sources of pollution) Rate_Patm_B
Proceeds from environmental tax on pollutant emissions into atmospheric air from
stationary sources of pollution, mln. UAH Tax_Patm_Ind
Comparison between the actual data and
the data obtained during simulation experiment
shows that the simulation results accurately re-
flect reality, and reliability testing confirms this
conclusion: the mean error of the simulation
results does not exceed 10,5 % (table. 2)1. Cer-
tain difference between the model and the stud-
1 In connection with changes in supervision
organization in 2010 as regards the scope of survey
units, the actual data and simulation results in terms
of number of regular employees are provided for
2005–2009.
ied city system is connected with the inclusion
of only significant factors and parameters in the
process of model building, the absence of exter-
nal influences on the system, existing in reality,
and introduction of assumptions.
On the basis of the fact that the reliability
testifying yields positive results, the conclusion
is made about validity of regularities that form
the model basis and possibility of model appli-
cation for conducting experiments in determin-
ing the influence of local taxation on the indus-
trial city development with the immutability of
all the other conditions.
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52 ISSN 1562-109X
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Table 2
Comparison of the modelling results for Donetsk city with the actual data
on the main indicators of the city development (a mean value for 2005-2010)
Average annual number of
resident population in the city,
thousand pers. (P)
Production output in the city,
mln. UAH (Y)
Average annual value of fixed
assets, mln. UAH (K)
Fact Model Fact Model Fact Model
988,399 987,253 120972,7 120276,8 49609,01 48550,76
Average number of employees
in the city, thousand pers. (L)
Proceeds from personal income
tax, accumulated to the city local
budget, mln. UAH (Tax_L)
Pollutant emissions into atmos-
pheric air from stationary
sources, thousand tons, (Patm)
Fact Model Fact Model Fact Model
338,004 322,852 613,86 576,36 116,2 112,6
Testing and analysis of modelling re-
sults
The development of the city, described by
the model, can be performed in different versions
depending on the tax authority and tasks at the
local level. The main variables (regulators) that
affect the functioning of the city under different
scenarios are the rates of investment and envi-
ronmental tax benefits _ _ [0,1]Rate PR B ,
_ _ [0,1]Rate Patm B . During the simulation
experiment the four scenarios of industrial city
development are considered.
1. The inertia scenario is simulated on
the basis of maintaining the existing tendencies
of the city development. By assumption (7), lo-
cal taxes consist of industrial enterprises income
tax, environmental tax on pollutant emissions
into atmospheric air from stationary sources of
pollution and personal income tax. All the local
tax revenues become the receipts of the city
budget. The tools of tax regulation are not ap-
plied, and their basic values are equal to zero:
_ _ 0Rate PR B , _ _ 0Rate Patm B .
The analysis of simulation results should
be started with the indicators of industrial sector
of the city through the fact that forming of local
taxation system and using of fiscal levers are
intended to solve the problems of an industrial
city in the application of tax resources mobilized
in the city, and regulators in optimization sce-
narios affect exactly the indicators of industrial
development. The results received allow making
the following conclusions (Fig. 3)1.
_________________________
1 The trends of development relative to the se-
lected indicators are given. For the convenience of
perception, the scale of the vertical axis is provided
in normalized form.
2005 2010 2015 2020 2025
1 Y_I
2 K_Ind
11 200
3 K_Nat
4 600
4 L_I
29
5 Patm
58
81
1 Y_I
2 K_Ind
16 300
3 K_Nat
12 300
4 L_I
37
5 Patm
127
169 1
2 3 4
5
1
2
3
4
5
1
2
3
4
5
1
2
3
4
5
1
5
Fig. 3 Main indicators of development of the city industrial sector (inertia scenario)
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ISSN 1562-109X 53
2012, № 3-4 (59-60)
Maintaining of trends, existing in 2005-
2010, leads to a fall in industrial production in
coming years. Decrease in the value of fixed
capital through the reduction of the fixed assets
investments in industrial sector of the city out-
strips a drop in production and is the reason for
it. A cut in environmental capital investments
impacts on the cleaning quality loss of pollutant
emissions into atmospheric air from industrial
enterprises, and, despite a decline in production,
emissions are growing. Therewith, the number
of employees on industrial enterprises decreases.
In the non-industrial sector there is a tendency to
production output growth along with an increase
in the value of fixed capital and the number of
employees (Fig. 4).
2005 2010 2015 2020 2025
1 Y_N
2 K_N
98 000
3 L_N
31 000
202
1 Y_N
2 K_N
139 000
3 L_N
66 000
223
1 2 3
1 2 3
1 2 3
1 2 3
1
Fig. 4 Main indicators of development of the city non-industrial sector (inertia scenario)
From the analysis of population sector in-
dicators and functional indices the following
conclusions about the functioning of the local
system can be made. Despite a decline in both
the death and birth rates, the decline in birth rate
outstrips the decline in death rate that leads to a
reduction in the number of resident population.
The GDP of the city is increasing during the
whole period of simulation due to the rise in
non-industrial sector, which compensates for the
decline in industrial sector. A significant imbal-
ance in sectors development during the forecast
years testifies to a possibility for the city of los-
ing its industrial function (Fig. 5).
2005 2010 2015 2020 2025
1 P
2 B
880,00
3 D
7,54
4 Y
12,80
5 K
113 000
6 L
44 000
7 L_S
281,00
0,75
1 P
2 B
1 010,0
3 D
8,41
4 Y
15,60
5 K
150 000
6 L
71 000
7 L_S
331,00
1,06
1
2
3
45
6
7
1
2
3 4 5
6
7
1
2
3
4 5
6
7
1
2
3
4 5
67 1
4
Fig. 5 Functional indices of city development (inertia scenario)
Such a succession of events is not desira-
ble because the industrial sector of Donetsk has
its huge industrial and scientific potential, ex-
pressed in the presence of enterprises and their
production capacities, specialization of produc-
tion, technological level, experience and qualifi-
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54 ISSN 1562-109X
2012, № 3-4 (59-60)
cation of personnel. The basis of this potential
was formed with the involvement of large in-
vestments, mostly – state ones (starting from the
times of the Soviet Union). The city complex is
highly integrated into the global economy and
has a large export value for the national econo-
my. Production, concentrated in particular in
Donetsk and Donetsk region, remains the loco-
motive of the state economic development.
To remedy the situation, alternative va-
riants of city development on the basis of the
optimization criteria with the help of tax levers
of regulation at the local level are needed to be
created.
2. The production scenario assumes the
maximization by the production output criterion.
Based on the assumption that the increase in
industrial product sales has a positive influence
on the growth of the employee’s wages in indus-
try and raise tax revenues of the budget, and
hence – the socio-economic component of the
city inhabitants’ welfare, the criterion of optimi-
zation is a function of:
_ ( _ _ ) max,
[ 1, ].
tY I Rate PR B
t m n
(1)
The value of the investment tax benefit,
which at the time of optimization has the form
of a constant, is _ _ 0,92Rate PR B . There-
fore, to maximize the value of industrial prod-
ucts sold in the last year of the simulation time
horizon it is necessary to put the earmarked in-
vestment tax benefit at the industrial enterprises
disposal in order to increase investments. The
tax benefit in the forecasting interval is fixed
and amounts to 92 % of the receipts from indus-
trial enterprises income tax1.
The additional investments have an am-
biguous impact on the development of the city
industrial sector (Fig. 6). In the forecast interval
the value of industrial products sold increases
due to the growth of investments, and that is the
criterion of optimization and the goal of invest-
ment tax benefit provision. The increase in the
number of employees is a response to the in-
crease in the value of capital. Pollutant emis-
sions into atmosphere are rising for two reasons:
the increase in industrial production and reduc-
tion of the environmental capital. Investments
are not enough for the environmental capital
growth that negatively affects the quality of pol-
lutant emissions cleaning.
2005 2010 2015 2020 2025
1 Y_I
2 K_Ind
15 000
3 K_Nat
11 600
4 L_I
32,8
5 Patm
100,0
80,0
1 Y_I
2 K_Ind
30 000
3 K_Nat
13 100
4 L_I
36,9
5 Patm
136,0
290,0
1
2
3
4
5
1 2
3
4 5
1
2
3
4
5
1
2
3
4
5
1
3
Fig. 6 Main indicators of development of the city industrial sector (production scenario)
The provision of the investment tax bene-
fit to the industrial enterprises does not signifi-
cantly affect the functioning of the city non-
industrial sector, so it is not considered in the
analysis of simulation results with other scena-
rios of development.
–––––––––––––––––––––––––––
1 To define a set of parameters that corre-
spond to the optimal solution, a system unit package
"Optimization" in Powersim software environment
was applied, methods of which is based on the use
of genetic algorithms.
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ISSN 1562-109X 55
2012, № 3-4 (59-60)
Investment support does not remain un-
seen to the city as a whole (Fig. 7), but along
with the increase in the value of products sold,
in the value of capital, and in the number of em-
ployees, the negative consequences turn out to
be impressive: a sharp reduction of population
number in the city through the growth of death
rate and the decline in birth rate, and an increase
of the level of employees’ temporary disability
for work.
2005 2010 2015 2020 2025
1 P
2 B
870,00
3 D
6,50
4 Y
13,70
5 K
113 000
6 L
44 000
7 L_S
309,00
0,84
1 P
2 B
1 010,0
3 D
8,50
4 Y
15,60
5 K
168 000
6 L
79 000
7 L_S
359,00
1,28
1
2
3
4 5
6 7
1
2
3
4 5
6 7
1
2
3
4 5
6
7
1 2 3
4 5
6
7
1
3
4
Fig. 7 Functional indices of city development (production scenario)
So, the production development scenario
leads to the growth in the industrial sector ac-
cording to the criterion of maximizing the pro-
duction output, which is connected with the
negative influence on the ecological component
of the city residents’ welfare.
3. The scenario of balanced develop-
ment. It is obvious that the growth of industrial
production in an industrial city is quite probable
and desirable thing, as well as the fact that the
main problem of an industrial city is environ-
mental deterioration. The application of the third
scenario is designed to minimize an impact of
the industrial production negative externalities
on the residents. The mechanism of the invest-
ment tax benefit remains unchanged, but, in or-
der to mitigate the consequences of the econom-
ic growth under the influence of investments in
the form of pollutant emissions increase, a part
of the environmental tax receipts – receipts from
the environmental tax benefit – is invested in
environmental capital (environmental fixed as-
sets). The criterion of optimality is formulated to
remain the function of production output mono-
tonically increasing and the function of pollutant
emission into atmospheric air from stationary
sources of pollution monotonically decreasing
over all forecasting interval:
_ _ ( _ _ ) 1,
_ ( _ _ ) 1,
[ 1, ],
t
t
Ratio Y I Rate PR B
Ratio Patm Rate Patm B
t m n
(2)
where _ _ tRatio Y I is the growth rate of pro-
duction output; _ tRatio Patm is the decline rate
of industrial pollutant emissions into atmospher-
ic air.
The value of investment and environmen-
tal benefits, which at the time of optimization
take on form of constants (in Powersim software
environment have a view of constants), is
_ _ 0,92Rate PR B and _ _Rate Patm B
0,79, respectively.
The application of such benefits leads to
the growth of industrial production output and to
the fall in pollutant emissions over the whole
forecasting interval (Fig. 8). Drop in emissions
is due to the significant increase in the value of
environmental capital, which directly influences
on the degree of emission cleaning.
–––––––––––––––––––––––––– Економіка промисловості Economy of Industry ––––––––––––––––––––––––––
56 ISSN 1562-109X
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2005 2010 2015 2020 2025
1 Y_I
2 K_Ind
15 000
3 K_Nat
11 600
4 L_I
35
5 Patm
100
40
1 Y_I
2 K_Ind
30 000
3 K_Nat
13 100
4 L_I
54
5 Patm
137
170
1
2
3
4
5
1 2
3
4
5 1
2
3
4
5
1
2
3
4
5
1
5
Fig. 8 Main indicators of development of the industrial city sector
(the scenario of balanced development)
The simultaneous provision of both bene-
fits in given values increases fertility and de-
clines mortality, reversing the population ten-
dency in the city. The number of employees dis-
abled to work because of pollutant emissions
into atmospheric air from stationary sources is
significantly lower than in the production scena-
rio (Fig. 9).
2005 2010 2015 2020 2025
1 P
2 B
933,00
3 D
7,60
4 Y
12,80
5 K
113 000
6 L
44 000
7 L_S
309,00
0,81
1 P
2 B
1 005,0
3 D
12,50
4 Y
15,60
5 K
169 000
6 L
79 000
7 L_S
362,00
1,06
1
2
3
4 5
6
7
1
2
3
45
6 7
1
2
3
4 5
6
7 1
2
3
4 5
6
7
1
2
7
Fig. 9 Functional indices of city development (the scenario of balanced development)
Trends in the scenario of balanced devel-
opment show the possibility of simultaneous
achievement of economic growth and environ-
mental welfare of the inhabitants with the help
of such levers of influence on city economy as
tax benefits. But this scenario requires signifi-
cant tax expenditures: the rates of benefits are
close to a unity. The problem lies in the fact that
the large (with a view of budget forming)
amount of tax revenues returns through tax regu-
lation mechanism to the industrial enterprises
for special-purpose financing. Another problem
occurs in the form of a sharp rather than gradual
reduction of receipts to the city budget. Given
the peculiarities of the city as an inertial system,
sharp changes in the economic and environ-
mental indicators are difficult to implement and
require tremendous effort and cost, and it is the
hopping in indicators changes that the calcula-
tion of the optimality criteria for the forecast
years shows (table. 3)1.
1 Growth rates are estimated on the basis of
simulation results of the scenario of balanced devel-
opment.
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ISSN 1562-109X 57
2012, № 3-4 (59-60)
Table 3
Forecast growth rates of industrial production output and pollutant emissions
into atmospheric air from stationary sources in 15 years
Year Ratio_Y_I Ratio_Patm
2011 1,030 0,826
2012 1,040 0,919
2013 1,040 0,935
2014 1,040 0,945
2015 1,040 0,953
2016 1,040 0,960
2017 1,040 0,966
2018 1,040 0,971
2019 1,040 0,976
2020 1,040 0,980
2021 1,040 0,984
2022 1,050 0,988
2023 1,050 0,991
2024 1,050 0,995
2025 1,050 0,999
The average growth rate 1,04 0,97
According to the table 3, the growth rate
of industrial production output is stable enough
with an average of 104%, and the rate of de-
crease of pollutant emissions in large measure
ranges from 83% to almost 100%. These results
testify a sharp fall in emissions in the beginning
of the forecast interval and show that the amount
of environmental benefit received is critical at
the end of the simulation time horizon. The solu-
tion of this problem can be found through the
use of a new criterion that is applied in a follow-
ing scenario.
4. The scenario of stable-sustainable de-
velopment. In this scenario, the term "stable"
refers to the impact of regulatory parameters on
the city system, which leads to its development
in the form of increase in industrial production
output with a constant rate. At the same time,
the scenario assumes a constancy of develop-
ment in view of the reduction in the anthropo-
genic load in the city in the form of reduction in
pollutant emissions into atmospheric air. Given
the importance of optimization criteria, obtained
during the simulation in the scenario of balanced
development, the purpose of further experimen-
tation is hipping reduction of indicators that are
optimized:
_ _ ( _ _ ) ,
_ ( _ _ ) ,
[ 1, ], (1, ), (0,1),
t t
t t
Ratio Y I Rate PR B
Ratio Patm Rate Patm B
t m n
(3)
where is a stable growth rate of the industrial
production output, and is a stable decline rate
of pollutant emissions into the atmospheric air
from stationary sources.
Due to the rates intervals, the condition of
monotone increase in industrial production out-
put and decrease in pollutant emissions is ob-
vious. When carrying out the experiment the
value of stable rate of growth of industrial pro-
duction output is the average of the table 3:
1,04 . Through the fact that the decline rate
of pollutant emissions significantly varies and to
the end of the simulation time horizon almost
reaches unity, a fall by 1% per year is assumed
as its stable value: 0,99 .
To meet such a criterion the variable rates
of tax benefits are applied, calculated from the
condition of gradual decrease of the investment
tax benefit rate and gradual increase of the envi-
ronmental tax benefit rate, which allows avoid-
ing fluctuations and abrupt changes both in the
development of the city and in tax revenues of
the city budget. Such approach allows us to re-
duce significantly the rate of investment tax
–––––––––––––––––––––––––– Економіка промисловості Economy of Industry ––––––––––––––––––––––––––
58 ISSN 1562-109X
2012, № 3-4 (59-60)
benefit in the forecast interval (from 92% to
60%) in comparison with the scenario of ba-
lanced development, in which the rates of bene-
fits are constant. In turn, the environmental tax
benefit increases gradually from 21% to 45%
(table 4).
Table 4
Calculated rates of tax benefits for the forecast period (The calculation is based
on simulation results for the scenario of stable-sustainable development)
Year Rate_PR_B Rate_Patm_B Ratio_Y_I Ratio_Patm
1 2 3 4 5
2011 0,92 0,207 1,04 0,99
2012 0,92 0,212 1,04 0,99
2013 0,92 0,245 1,04 0,99
2014 0,91 0,285 1,04 0,99
2015 0,90 0,295 1,04 0,99
2016 0,87 0,310 1,04 0,99
2017 0,84 0,320 1,04 0,99
2018 0,81 0,335 1,04 0,99
2019 0,78 0,350 1,04 0,99
2020 0,75 0,362 1,04 0,99
2021 0,72 0,376 1,04 0,99
2022 0,69 0,395 1,04 0,99
2023 0,66 0,410 1,04 0,99
2024 0,63 0,430 1,04 0,99
2025 0,60 0,450 1,04 0,99
Owing to the application of proposed tax
benefits in the industrial sector a simultaneous
planned growth of production output occurs as a
result of the investments growth in production
capital and the reduce of pollutant emissions
into atmospheric air from stationary sources
through the increase of investments in the en-
vironmental capital. Along with the capital
increase the number of employees grows
(Fig. 10).
2005 2010 2015 2020 2025
1 Y_I
2 K_Ind
15 000
3 K_Nat
11 630
4 L_I
35
5 Patm
100
70
1 Y_I
2 K_Ind
29 000
3 K_Nat
12 370
4 L_I
45
5 Patm
137
169
1
2
3
4
5
1
2 3 4
5
1
2
3 4
5
1 2
3 4
5
1
5
Fig. 10 Main indicators of development of the industrial city sector
(the scenario of stable-sustainable development)
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ISSN 1562-109X 59
2012, № 3-4 (59-60)
Due to the increase of capital and labour,
the GDP of the city grows (in the form of prod-
ucts sold). The growth rate of employees dis-
abled to work is significantly behind the em-
ployees’ growth rate. Fertility rates are close to
the indicators of mortality, and obtained trend
maintaining will lead to a reversal in the direc-
tion to fertility and city population growth in the
near future (Fig. 11).
2005 2010 2015 2020 2025
1 P
2 B
900,00
3 D
7,60
4 Y
12,60
5 K
113 000
6 L
44 000
7 L_S
309,00
0,83
1 P
2 B
1 010,0
3 D
9,10
4 Y
15,60
5 K
167 000
6 L
78 000
7 L_S
361,00
1,06
1
2
3
4 5
6
7
1
2
3
4 5
6 7
1
2
3
45
6
7 1
2
3
4 5
6
7
1
2
7
Fig. 11 Functional indices of city development
(the scenario of stable-sustainable development)
In the simulation experiment, the criteria
of application of the local taxation regulation
function were: maximization of production out-
put and minimization of industrial pollutant
emissions. Since the increase in tax revenues has
not been the task of the optimization, the indica-
tor of tax revenues in the city is added to simula-
tion results as an indicator of fiscal function of
the proposed local taxation system and one of
the criteria for socio-economic development1 –
the inhabitants’ provision with public services
according to the utilitarian function of public
welfare. In line with results obtained during si-
mulation under different scenarios (table 5) the
following conclusions are made up.
In the inertia scenario indicators of pro-
duction output, capital and labour in the indus-
trial sector and in the city as a whole are the
lowest. The number of disabled to work through
the atmosphere pollution is low by reducing the
1 The larger amount of tax revenue corre-
sponds to the greater value of the social welfare func-
tion, because tax revenues are considered from the
point of view of equivalence to public services at the
local level.
number of employees. Local taxes in full
amount enter to the city budget that has a posi-
tive effect on the budget revenues.
The provision of investment tax benefit in
the production scenario stimulates the growth of
industrial production output through the increase
of production capital, and at the same time sub-
stantially worsens the atmospheric air quality
that leads to the increase in morbidity and mor-
tality, has a negative impact on the birth rate,
and ultimately leads to depopulation. This is the
scenario of an ecological catastrophe. In addi-
tion, provision of investment tax benefit reduces
the revenues of the city budget.
In the scenario of balanced development
the receipts of permanent investment and envi-
ronmental benefits provided are enough for si-
multaneous growth of production output and
reduction of pollutant emissions into the atmos-
phere. This is an ideal scenario, but for one re-
mark: its implementation requires considerable
financial resources from the city budget.
The scenario of stable-sustainable devel-
opment does not show such rates of growth in
production and fall in emissions as the previous
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60 ISSN 1562-109X
2012, № 3-4 (59-60)
Table 5
Main indicators of city development according to the different scenarios
at the end of the time horizon
Indicators The results of different scenarios of development
1 2 3 4
Y_I 11203,36 29583,01 29694,07 28508,40
K_Ind 4684,72 13047,46 13084,91 12360,66
K_Nat 29,18 32,88 53,59 44,69
L_I 58,34 135,42 136,22 136,00
Patm 104,85 280,13 43,16 70,32
P 889,90 873,80 933,67 903,07
B 7,54 6,58 12,49 9,06
D 12,89 15,37 12,82 12,68
Y 149459,18 167600,33 168381,02 166918,85
K 70189,52 78533,14 78621,30 77883,27
L 281,85 358,82 361,01 360,14
L_S 0,75 1,27 0,91 0,98
Local_Taxes 13674,79 13293,38 13278,16 13682,67
one; however, there is a possibility for the con-
siderable budget expenditures reduction due to a
gradual impact on the economic system. Com-
paring the receipts of the budget in the inertia
scenario (without the provision of tax benefits)
with the receipts of the stable-sustainable devel-
opment (provided their gradual changes), the
budget revenues of the later one are higher
through the positive impact of earmarked tax
benefits receipts on economic growth and im-
provement of ecological situation in the city.
The conditions of production growth, pollutant
emissions fall and tax revenues increase are car-
ried out over the same time interval. Applied
mechanism of a gradual reduction of investment
tax benefit will allow nullifying its rate in the
laps of time, and the mechanism of the environ-
mental tax benefit increase reflects the pattern of
the expenses increase for environmental protec-
tion activities in the future. Such a scenario can
be referred to as real.
Conclusions
Industrial city is the driving force that
raises the welfare of country’s population to a
higher level, and territorial units with prevailing
of energy-intensive environmentally dangerous
production of metallurgical, fuel-energy and
chemical industries are donors to the consolidat-
ed budget of the country. At the same time, in-
dustrial cities like a litmus paper show the most
acute problems of industrial development from
demographic to environmental. At the present
stage of development of industrial cities and the
country as a whole renunciation of the produc-
tion of environmentally harmful industries in the
short term is not possible, but the concept of the
support of the economic activities, that have
achieved competitive advantages due to the use
of available natural resources and acquired
many years' experience, seems to be reasonable.
And stable rates of industry economic growth
should not impede social development and envi-
ronmental safety of the city – the focus on pre-
venting from deterioration of environmental si-
tuation should be a prerequisite to economic
growth in an industrial city.
The hypothesis of the research is as fol-
lows. In an industrial city, that has its peculiar
problems and features of development, an in-
crease in tax revenues and economic growth can
be achieved over a certain time interval due to
the changes in the tax policy at the local level.
Functioning in the framework of the state
industrial policy an industrial city has to be pro-
vided with certain economic levers and financial
resources for the solution of its distinctive tasks.
One of the most powerful economic levers is tax
regulation. However, its application requires
having sufficient tax authority at the local level.
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ISSN 1562-109X 61
2012, № 3-4 (59-60)
Depending on the city functional feature, the
possibility has been studied of transferring to the
competence of industrial city municipal authori-
ties such taxes as industrial enterprises income
tax, environmental tax on pollutant emissions
into atmospheric air from stationary sources of
pollution, and personal income tax with granting
them the status of local and the possibility of tax
benefits application (investment and environ-
mental tax benefits). The rates of tax benefits,
calculated during the simulation experiment in
different scenarios, take on values: investment
tax benefits – from 60% to 92%, and environ-
mental tax benefit – from 21% to 79%. The pro-
ceeds received can be spent on special-purpose
financing only.
The results of the economic-mathematical
modeling confirm the fact that the presence of
significant tax levers at the local level and the
possibility of their application for the regulation
of economic development contribute to the
growth of socio-economic indicators of the city.
Taking into account the above-mentioned, such
recommendations on forming a local taxation
system in an industrial city are made.
(1) In an industrial city, taking into con-
sideration the peculiarities of functioning, based
on the principles of fiscal equilibrium and tax
autonomy, consider the possibility of transfer-
ring the proposed taxes to the local level, name-
ly: industrial enterprises income tax, environ-
mental tax on pollutant emissions into atmos-
pheric air from stationary sources of pollution,
and personal income tax, that require adopting
an appropriate amendment to the Tax code. The
transfer of such tax authority will allow using
both fiscal and regulatory functions of taxes at
the city level. This, in turn, will contribute to
undertaking city’s own tax policy and solution
of social and economic problems.
(2) In case of adopting the transfer of pro-
posed taxes to the local level, complement the
list of tax benefits on local taxes and fees with
the investment tax benefit on industrial enter-
prises income tax and environmental tax benefit
on environmental tax on pollutant emissions into
atmospheric air from stationary sources of pollu-
tion, upon the condition that tax benefit receipts
can be spent on special-purpose financing only.
(3) Open special accounts for tax benefits
receipts at the enterprises, financial resources of
which ought to be spent only on increasing the
value of fixed assets: receipts from investment
tax benefit – on production and environmental
fixed assets, and receipts from environmental
tax benefit – on environmental fixed assets only.
Therefore, the mechanism is proposed, through
which it would be beneficial for enterprises to
invest in fixed assets. In this case, the applica-
tion for investment tax benefit contributes to the
growth of economic activity in the city, and the
mechanism of environmental tax benefit provi-
sion is intended to prevent from industrial pollu-
tant emissions growing.
(4) Regarding the choice between variants
of granting tax benefits, such a choice is based
on the preference function that underlies a poli-
tical decision-making, and if economist can not
find out this function, he is unable to evaluate
past decisions or improve future ones. Econo-
mist only specifies the set of possible alterna-
tives, on the basis of which the decision-maker
selects the best one, bearing in mind his prefe-
rence function [29, 215]. According to the re-
sults of the experiment simulation, in one of the
acceptable options the set of tax benefits rates is
permanent (the scenario of balanced develop-
ment), and in another one it is variable (the sce-
nario of stable-sustainable development). One is
called rather for solution of industrial and envi-
ronmental problems, another one – industrial,
environmental and budget problems. Choosing
one or another variant of benefit taxation de-
pends on goals set, and methods and terms of
their achievement.
The significance of the results, obtained
in the course of simulation, is presented in the
opportunity of reflecting the impact of proposed
local taxes on the city economy and outlining
the main directions of forming the local taxation
system in the industrial city.
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Received on 11.10.2012
|
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| institution | Digital Library of Periodicals of National Academy of Sciences of Ukraine |
| issn | 1562-109Х |
| language | English |
| last_indexed | 2025-11-28T18:13:02Z |
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| publisher | Інститут економіки промисловості НАН України |
| record_format | dspace |
| spelling | Petrenko, Yu.O. 2013-09-16T10:41:53Z 2013-09-16T10:41:53Z 2012 Industrial City Development under the Influence of Local Taxation / Yu.O. Petrenko // Економіка пром-сті. — 2012. — № 3-4. — С. 43-63. — Бібліогр.: 29 назв. — анг. 1562-109Х https://nasplib.isofts.kiev.ua/handle/123456789/49331 336.22:352 Розглянуто основні проблеми промислового міста, проаналізовано моделі, використовані при вивченні функціонування системи міста; побудовано модель розвитку промислового міста під впливом місцевого оподаткування; розраховано основні показники розвитку міста і запропоновано рекомендації щодо формування системи місцевого оподаткування в промисловому місті. Ключові слова: місцеве оподаткування, модель розвитку міста, промислове місто. Розглянуто основні проблеми промислового міста, проаналізовано моделі, використовані при вивченні функціонування системи міста; побудовано модель розвитку промислового міста під впливом місцевого оподаткування; розраховано основні показники розвитку міста і запропоновано рекомендації щодо формування системи місцевого оподаткування в промисловому місті. Ключові слова: місцеве оподаткування, модель розвитку міста, промислове місто. The Ukrainian economy will not be able to take a worthy place in the world’s economic space without the solution of problems concerning effective industrial production development. Functioning in the framework of the state industrial policy, industrial city has to be given certain economic levers and financial resources to address its own problems at the local level. One of the most powerful economic levers is taxation, which at the city level is represented by an institute of local taxation. The hypothesis of the research is that in an industrial city, which has its peculiar problems and features of development, it is possible to achieve an increase in tax revenues and economic growth in a certain time interval at the expense of tax policy changes at the local level. Taking into account the hypothesis of the research, considering existing city models and institutional peculiarities of Ukraine, a system-dynamic model of industrial city development under the influence of local taxation is proposed, developed in the framework of neoclassical economic theory. The modeling object is industrial Donetsk city. The model includes industrial city problems such as the shortage of investment resources, that has a negative influence on availability of fixed assets, and through them to production output, as well as environment in the form of pollutant emissions into atmospheric air, which has a direct negative impact on the health status of population, life expectancy, and therefore human capital as a factor of economic growth. Three taxes are suggested forming the local taxation system: industrial enterprises income tax, environmental tax on pollutant emissions into atmospheric air from stationary sources of pollution, and personal income tax. The results of economic-mathematical modeling confirm the fact that the presence of significant tax levers at the local level and the possibility of their application for regulation of economic development contribute to the growth of socio-economic indicators of the city. Keywords: local taxation, city development model, industrial city en Інститут економіки промисловості НАН України Економіка промисловості Проблеми стратегії розвитку та фінансово-економічного регулювання промисловості Industrial City Development under the Influence of Local Taxation Розвиток промислового міста під впливом місцевого оподаткування Развитие промышленного города под влиянием местного налогообложения Article published earlier |
| spellingShingle | Industrial City Development under the Influence of Local Taxation Petrenko, Yu.O. Проблеми стратегії розвитку та фінансово-економічного регулювання промисловості |
| title | Industrial City Development under the Influence of Local Taxation |
| title_alt | Розвиток промислового міста під впливом місцевого оподаткування Развитие промышленного города под влиянием местного налогообложения |
| title_full | Industrial City Development under the Influence of Local Taxation |
| title_fullStr | Industrial City Development under the Influence of Local Taxation |
| title_full_unstemmed | Industrial City Development under the Influence of Local Taxation |
| title_short | Industrial City Development under the Influence of Local Taxation |
| title_sort | industrial city development under the influence of local taxation |
| topic | Проблеми стратегії розвитку та фінансово-економічного регулювання промисловості |
| topic_facet | Проблеми стратегії розвитку та фінансово-економічного регулювання промисловості |
| url | https://nasplib.isofts.kiev.ua/handle/123456789/49331 |
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