Identification of the problems of tax incentives application to human capital in Russia

Vasil'chenko Anna Dmitrievna Postgraduate Student; Department of Taxes and Tax Administration, Faculty of Taxes, Audit and Business Analysis; Financial University under the Government of the Russian Federation 49/2 Leningradsky ave., Moscow, 125167, Russia Annavasil24@gmail.com Other publications by this author

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The problems of using tax incentives for human capital are an important issue in the modern economy. Tax incentives can be an effective tool for the development of human capital, but their application often involves a number of difficulties in practice. Thus, the problems of using tax incentives for the development of human capital in Russia can be classified as follows: economic problems, administrative problems, social consequences of using tax incentives, and problems of information awareness about tax incentives. This classification of problems in the use of tax incentives for the development of human capital is necessary for an improved understanding of them, as well as for developing effective solutions to eliminate existing problems in tax legislation and increase the effectiveness of tax incentives for the development of human capital.

As part of the research, we will prioritize the approach from which human capital should be considered as an economic category. This conclusion is based on the following circumstances. The approach of recognizing human capital as an economic asset is rather narrow, because it considers it only from the perspective of companies at the micro level ^[26]. At the same time, the constituent elements of human capital that are not directly used by companies are not considered. In addition, with this approach, human resources with human potential, but not employed in the labor market, remain outside the scope of research assessment. In turn, the resource approach considers human capital only at the macro level, without paying due attention to the individual characteristics of people that affect the efficiency of using human capital ^[27]. The economic category recognition approach is broader and takes into account a greater number of elements of human capital that affect its condition.

The modern definition of human capital can be revealed as follows: human capital is a complex economic category that acts as an intensive productive and social factor of economic growth, inextricably linked to man, intelligence and mentality; presented in the form of a set of its constituent elements and financed by investments in upbringing, education, health, knowledge, entrepreneurial ability, information education, science, culture and art.

Literature review

Issues related to the development of human capital are based on the works of domestic and foreign authors: Becker G., Kapelyushnikov R. I., Marshall A., Neumann F., Nureyev R. M., Petty W., Smith A., etc. The authors draw attention to the importance of human capital in shaping the country's economy. Most researchers consider human capital as a factor of economic growth and as a factor of production, investments in the development of human capital become a condition for increasing human productivity in the process of carrying out their work.

In particular, the issues of tax incentives for the development of human capital were considered both in Russia and abroad.: Lavnik R. V. And Pyanova M. V. ^[19] identify the most priority areas of human capital investment: education and healthcare. Malkova Yu.V. ^[9] identifies a significant number of tax instruments that are aimed at providing social support to certain groups of citizens. Pinskaya M. R. ^[16] highlights the relevance of the tax on professional income, which can involve every fourth able-bodied person. M. V. Pyanova ^[18] highlights that tax benefits are no less important than direct spending of budget funds on the development of education and healthcare systems. Tikhonova A.V. And Akulov A. Ya. ^[23] highlight the differences between existing tax incentives aimed at developing human capital in developed and developing countries. Tikhonova A.V. ^[25] identifies three zones of influence of taxation on the formation of human capital: maintaining the current level of the human capital index, ensuring individual and corporate investments in human capital.

An overview of the main instruments of tax incentives for human capital

In Table 1, we will consider examples of tax benefits and preferences for the development of human capital in Russia by elements such as education, healthcare, entrepreneurship, and quality of life.

Table 1 – Examples of systematized benefits and preferences for stimulating human capital in Russia

Source: compiled by the author on the basis of the Tax Code of the Russian Federation.

Thus, the systematization of tax benefits and preferences for stimulating human capital in Russia shows that tax incentives can be provided to organizations and individuals investing in education and healthcare. Entrepreneurial abilities can be stimulated by taxes, for example, such as reduced tax rates and tax holidays. Tax incentives for the quality of life are mainly social in nature and are aimed at improving the social well-being of the population.

Classification of problems in the use of tax incentives for human capital

The use of tax incentive tools for the development of human capital is associated with a number of methodological problems rooted in the difficulties of developing, applying and subsequently evaluating the effectiveness of tax benefits and preferences. The author identifies the following classification of problems of using tax incentive tools for the development of human capital:

1. Economic problems.

The first group of problems is related to the economic difficulties of targeting instruments of tax incentives for the development of human capital. All sectors of the economy evolve over time, and the development of new technologies and practices changes the demand for certain skills. As the digital economy develops, the concept of human capital goes beyond educational achievements and labor-related attributes to embrace digital thinking and competencies. Tax incentives that are not tailored to these diverse needs are unable to effectively support the development of relevant skills. At the same time, different sectors of the economy require different sets of skills and levels of training. The instruments of tax incentives for human capital development in Russia are not adapted to the conditions of the fourth industrial revolution. There are no tax instruments in Russia similar to the Formazione 4.0 tax credit in Italy, the Productivity and Innovation Credit in Singapore, and the Crédit d'impôt Formation du Dirigeant tax credit in France ^[4]. Tax benefits and preferences are not provided to companies investing in education and retraining of employees.

At the same time, attracting excessive investments in specific areas through tax incentives may eventually lead to an oversupply of labor in them. For example, tax instruments to stimulate the IT sector are quite actively used in Russia: a reduced corporate income tax rate of 3% (from mid-2022 to the end of 2024, it was reset to zero, and in 2025-2030 it will amount to 5%), reduced insurance premium rates of 7.6%. The Russian Ministry of Finance estimated the revenues from the application of tax benefits to accredited IT companies in 2022-2024 at 10 billion rubles for corporate income tax and 250 billion rubles. on insurance premiums ^[7]. According to HeadHunter online recruitment (xx.ru ): "The situation with human resources in 2023 in the country's IT sector is quite different from what happened in 2021, when the staff shortage was very high and the activity of applicants, on the contrary, was low. A lot has changed in 2023: if in June 2021 there were about three resumes per vacancy, now there are more than six" ^[14].

At the same time, the agricultural sector is crucial for the country's food security, and the shortage of skilled workers in it negatively affects food production and the sustainability of the economy as a whole ^[3]. Compared to such active tax incentives in the IT sector, the lack of working specialties is also not corrected by tax incentives, which leads to a bias in incentives at the macro level.

In addition, from the standpoint of ensuring environmental safety in Russia, there are still no tax incentives for both ESG projects in general and for the development of human capital in this area, therefore, due to the lack of government support, businesses face many problems in implementing the principles of sustainable development.

It is also important to take into account that companies of different sizes have different susceptibility to tax incentives for human capital. For example, tax incentives that do not cover specialized, expensive training programs are not effective for large technology companies, while small businesses, on the contrary, will take advantage of the same tax incentives for low-cost training programs. It is no coincidence that tax incentive programs for continuing education in many foreign countries apply to companies of any size, but it is for small businesses that they usually provide the most support, including co-financing the costs of additional training and advanced training. Examples include the employee continuing education and skills development program (SkillsFuture Enterprise Credit) in Singapore, as well as the already mentioned tax credit for manager training (Crédit d'impôt Formation du Dirigeant) in France, and a tax credit called Training 4.0 (Formazione 4.0) in Italy ^[4].

Tax instruments for stimulating human capital should be aimed at encouraging businesses to invest in innovation and technology in order to ensure competitiveness and economic growth. However, the existing tax preferences are mainly concentrated around the R&D costs themselves and are less targeted at the personnel who implement them. Labor costs can also be attributed to R&D expenses, if their relationship to a specific R&D is traced. However, there is no possibility of attributing to R&D expenses the costs of professional development of employees directly involved in their implementation. The introduction of appropriate amendments to the tax legislation would have a positive effect on stimulating the list of research and development activities, the costs of which can be included in expenses with a coefficient of 1.5.

High returns are important for tax incentives. Direct government spending on human capital provides higher returns compared to the indirect benefits of tax breaks for individual industries. In reality, tax incentives, on the contrary, are often aimed at investing in skills with low demand in the labor market.

For example, the share of benefits and preferences in education for budget–forming taxes (VAT, personal income tax and corporate income tax) in the total amount of direct state support amounted to 3.17% in 2021, 2.57% in 2022, 3.67% in 2023, and the share of benefits and preferences in healthcare in 2021 – 6.12%, in 2022 – 5.16%, in 2023 – 8.00% of the volume of direct government support (Figure 1).

Figure 1. The share of tax incentives for 2021-2023 from the volume of direct government support, %

Source: compiled by the author on the basis of federal budget expenditure data and data from the Federal Tax Service of Russia.

One of the key blocks of problems of tax incentives for the development of human capital is the general limited budgets and opportunities to reduce it due to the provision of tax incentives. To balance tax incentives, the possibility of imperative influence on employers is being considered in order to oblige them to invest in educational projects, ensuring the targeted nature of tax benefits and increasing business responsibility. Thus, the Ministry of Finance of Russia is considering the possibility of obliging accredited IT companies to invest 5% of industry tax benefits in the education of students of specialized specialties in Russian universities ^[7]. It seems that in order to achieve these goals, it would be more effective to use the experience of the UK (loan for the Apprenticeship Levy) ^[6] and Singapore (Skills Development Levy) ^[11]. In Russia, it is also possible to introduce a non-tax payment from large companies for the development of continuing education programs in industry 4.0 skills, and to provide those companies that implement the relevant programs with the opportunity to cover their expenses from the accrued amounts of this non-tax payment.

In the context of the economic difficulties of targeting instruments for tax incentives for the development of human capital, the amount of administrative overhead costs is also important, which cannot be estimated due to their closed departmental nature. Although, of course, the digitalization of the economy and tax administration can significantly reduce administrative overhead costs and partially offset this problem.

2. Administrative problems.

The second group of problems is related to administrative difficulties in the practical implementation of tax incentive programs for the development of human capital. Let's look at them in more detail in Table 2.

Table 2 – Administrative problems of applying tax incentives for human capital with examples and solutions

Source: compiled by the author himself.

3. The social consequences of applying tax incentives.

The third group of problems in the practical implementation of tax incentive programs for the development of human capital is related to the social consequences of their application. Tax incentives increase economic inequality among economic entities (companies, individual entrepreneurs, individuals), as they provide them with disproportionately large benefits and increase income disparity.

Tax incentives provide greater advantages to individuals with higher incomes or larger organizations, since they initially have more opportunities to raise financial resources for upfront investments in education, professional development, and health care, while tax incentives are given after the fact and only lower the cost of previously made investments for them. At the same time, unlike the property deduction for the purchase of housing, which is unlimited and can be received in all subsequent years until the taxpayer chooses the full amount of the tax deduction, social tax deductions are provided only in the year when educational services were received. Therefore, if a taxpayer has the right to claim both property and social tax deductions in one year, then first of all it is better to start with a social tax deduction, since it cannot be postponed.

Another striking example of the limitations of tax preferences is that they primarily focus on providing incentives to classical educational institutions such as schools and universities, while benefits for continuing professional development and professional retraining are limited. Such a narrow scope of tax incentives hinders the holistic development of human capital, limiting the applicability of tax incentives to a limited range of educational activities.

Tax credits often cover only part of the costs related to education, professional training, such as tuition fees, but not related expenses such as books, transportation, or living expenses. For example, there are such deductions in Mexico and Panama. In Panama, such a deduction is $3,600 per child; in Mexico, the associated costs are deductible in full.

However, a much bigger problem in this regard is the problem of covering interest on educational loans. Many people who want to invest in their education and skills development are forced to take out educational loans. However, the interest on them is not included in the social tax deductions for education, because they apply only to the actual tuition fees. The absence of a tax deduction for an educational loan in the Tax Code limits people's access to education and skills development. Unlike in Russia, in most economically developed foreign countries, the institute of educational credit is incorporated into tax legislation and allows taxpayers to reduce the cost of investing in their education and training by deducting interest on educational loans.

In conditions of limited income, citizens are often forced to look for alternative financial mechanisms to cover the costs of medical services. The difference from an educational loan is that there are practically no targeted medical loans specifically designated to finance medical procedures. As a result, citizens have to turn to consumer loans or various forms of installments and deferred payments to finance their medical needs. Based on the above, it seems necessary to introduce personal income tax-free savings accounts specifically designed to accumulate funds for education and large medical expenses to encourage families to save money for their children's future education.

Addressing the negative social consequences of the use of tax instruments for the development of human capital requires the development of inclusive, affordable tax incentives consistent with the diverse needs of economic entities, different territories and industries. Tax incentives for the development of human capital should be consistent with the strategy of regional economic development. For example, rural areas demand incentives focused on the development of human capital in agriculture or local small businesses, while for large technological developed cities, tax incentives in the field of technology and services are more important. If local organizations and their employees are unable to take advantage of tax incentives, this will result in regional imbalances in the development of human capital. In this regard, the Japanese experience with a combination of grant support for the development of human resources in the regions (Japanese Human Resource Development Grant) with the possibility of reducing the corporate tax rate for companies moving to legally established areas of regional revival and employment promotion (Act on Special Measures Concerning Taxation) seems interesting ^[12].

4. Problems of information awareness about tax incentives

The fourth group of problems is related to the practice of using tax incentive programs for the development of human capital. Legislators usually assume that economic entities are aware of these incentives, but there is an information imbalance in the real economy, where individuals with higher incomes and large organizations usually have more access to information about tax benefits and technical capabilities for applying for tax deductions, while small organizations and people with low incomes are not always fully aware of the existing preferences and the procedure for their use.

This lack of awareness may be the result of inadequate government communication strategies or limited access to information channels. In addition, information about tax benefits is often presented in complex legal and technical language, which makes it difficult for an ordinary person or a small business owner to understand their benefits and how to access them. Some beneficiaries may lack the technological resources or skills needed to navigate online application systems, especially in regions with limited Internet access or among the elderly. Clear and consistent communication with potential beneficiaries is crucial to ensure that they understand how to apply for and use tax benefits. This requires well-designed awareness-raising programs and accessible information resources.

Conclusions

In the course of this study, the author has formulated the following conclusions:

1. The economic problems of using tax instruments for the development of human capital are primarily related to their inefficiency and budget costs, which underlines the need for careful development and evaluation of tax incentives to ensure that they effectively contribute to the development of human capital without leading to an irrational allocation of resources, loss of income or budget constraints. Solving all these economic problems requires a balanced approach that takes into account both the direct and indirect impact of tax incentives on the economy as a whole and public finances.

2. Effective implementation of tax incentives aimed at the development of human capital requires coordination between the Federal Tax Service of Russia, the Ministry of Education and Science, the Ministry of Health, the Federal Service for Labor and Employment (Rostrud). Ensuring uninterrupted communication and cooperation between these agencies is often a difficult task, but it is not limited to it alone, because a reliable technological infrastructure for accounting and administration of granted preferences is important for the implementation and management of tax preferences for the development of human capital. Developing and maintaining such an infrastructure is an expensive undertaking that requires additional financial costs, reliable data management and security practices. At the same time, it should be borne in mind that the collection and management of data related to tax benefits involves the processing of confidential personal and financial information. Ensuring data privacy and security is crucial, but it can be challenging, especially given limited resources and technological capabilities.

3. In order to identify the most effective tax incentives, a reliable methodology is needed to assess the effectiveness of existing and proposed tax incentives, which allows taking into account many non-tax factors, because changes in human capital development are difficult to link solely to tax incentives due to much more multifaceted other socio-economic factors. For this reason, it is important to analyze behavioral reactions and identify potential unforeseen consequences of tax incentives for human capital development. Understanding how organizations and individuals respond to tax incentives, as well as their potential side effects, requires use to analyze elements of behavioral economics and comprehensively assess the impact of tax incentives on the behavior of economic actors. Assessing the long-term impact and sustainability of tax incentives for human capital development requires longitudinal research, comprehensive socio-economic analysis, and the development of econometric models to predict the sustainable impact of tax preferences on human capital development.

4. The use of tax incentive tools for the development of human capital in Russia is hampered by a whole range of problems, the solution of which requires a comprehensive review and refinement of tax legislation to incorporate clear and inclusive provisions for the development of human capital. By optimizing administrative processes and expanding the scope of tax benefits, Russia can create a favorable environment for organizations to effectively use tax benefits for the development of human capital. Solving all these problems requires concerted efforts on the part of politicians, tax authorities and relevant stakeholders aimed at creating conditions conducive to the use of tax incentives for the development of human capital in Russia.