According to our estimates (see Appendix A) the total volume of PIT should have amounted to BYR 36.2 trillion in 2015, which fits actual data. PIT revenues in the consolidated budget in 2015 were equal to BYR 37.0 trillion.<sup>9</sup> The ratio of estimated PIT paid by households and gross income from employment of household members is 11.3%, which can be viewed as the effective PIT rate in Belarus. The modelled PIT payments are distributed rather progressively both in absolute and relative terms (see Figure 7a). Lower deciles pay less in personal income taxes than upper deciles if measured as a share of their disposable income before taxation due to deductions provided to households with children and low-paid employees. Another factor is the lower share of employment income in disposable resources of lower deciles. Among the bottom five deciles, only the first decile relies on employment income to the same extent as the population on average (around 50% of disposable income of the first decile is generated by employment income). This stratum is comprised more of households with children and less so of households with pensioners compared to other low-income deciles<sup>10</sup> , which explains the higher role of employment income in their disposable resources. Consequently, the first decile has a slightly higher PIT tax burden than other low deciles.

_Taxation of entrepreneurs_ is not uniform. It depends on the type of entrepreneurial activity, the place of residence, and its scale. In general, entrepreneurs may pay taxes on a general basis, may apply a simplified tax regime for entrepreneurs, or pay a lump-sum tax set by local authorities. Therefore, the modeling of entrepreneurial taxes was based on macroeconomic data. The total amount of taxes paid by entrepreneurs in 2015 amounted to BYR 4,212.8 billion, while total number of entrepreneurs as of the end of 2015 was 240,781<sup>11</sup> . This means that on average an entrepreneur paid BYR 1,458,000 of taxes monthly. This volume of payments was assigned to every individual who had entrepreneurial income.

Information on related income is provided in HBS files together with income from side (day-to-day) jobs as a part of employment income. We assumed that entrepreneurial income was only that exceeding 2 minimal wages in annual terms. This threshold guaranteed that the number of entrepreneurs in HBS files corresponded to their total amount<sup>12</sup> .

# _Social Protection Fund contributions_

The Social Protection Fund (SPF) finances public expenditures on pensions and social benefits. Contributions to SPF are payroll taxes at the rate of 35%. Employers pay the main part of the tax (34%), while employees are charged 1% of their gross wage. According to legislation, lower rates (31%, i.e. 30 and 1%) are levied on those employed in the agricultural sector (at enterprises with agricultural production exceeding 50% of total production). As most of rural population in Belarus is employed in the agricultural sector, we assumed that all rural population pays the payroll tax at the rate of 31%.

Furthermore, there are upper and lower bounds for the payroll tax base. It should not be lower than the minimum wage and should not exceed 5 average wages in the case of full employment. In our sample there were only 3 observations, where gross wages exceeded 5 average wages. For these persons, SPF contributions were calculated as 35% of the upper bound.

In practice, the lower bound is not applied for the employed as the minimum wage regulation applies in Belarus. It is more relevant for entrepreneurs. They are obliged to pay contributions to the SPF at the rate not less than 35% from minimal wage. Entrepreneurs can choose to pay contributions from higher wage base but they are reluctant to do it, as it does not guarantee a feasible increase in future pensions. Hence, we assumed that entrepreneurs paid contributions to the SPF at the volume of 35% of minimum wage<sup>13</sup> .

> 9 In BYR before denomination of 2016 by 10,000 times. For revenues in BYR after denomination; see Table 1.

> 10 81% of households in the 1st decile ranked by disposable income before personal income taxation are households with children, while the average share is 47.5% (48.5% for the 4<sup>th</sup> decile). The share of households with at least one member above 60 years old is 37.3% in the first decile and 57% on average in the sample (72.1% in the 4<sup>th</sup> decile).

> 11 - Ministry on Taxes and Duties of Belarus, www.nalog.gov.by/uploads/folderFor

> <u>Links/Ежемесячно%20на%20сайт%20по%20СМП%20и%20ССП%20на%2001.01.2017.xlsx.</u>

> 12 According to this approach, the number of entrepreneurs in HBS file corresponds to the total number of 218,000.

> 13 SPF contributions by entrepreneurs are paid once a year in February. It means that in 2015 entrepreneurs paid contributions for 2014. So we estimated payment based on annul average minimum wage of 2014.

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