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Personal Income Taxation Determinants in Federation of Bosnia and Herzegovina

Palić Irena, Hodžić Sabina and Dumičić Ksenija
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Palić Irena: Faculty of Economics and Business, University of Zagreb, Zagreb, Croatia
Hodžić Sabina: Faculty of Tourism and Hospitality Management, University of Rijeka, Rijeka, Croatia
Dumičić Ksenija: Faculty of Economics and Business, University of Zagreb, Zagreb, Croatia

Business Systems Research, 2019, vol. 10, issue 1, 153-163

Abstract: Background: In recent years’ income inequality has been an economic issue. The primary instrument for redistributing income is personal income tax. However, based on economic theory income inequality concerns indicators such as wages, transfer payments, taxes, social security contributions, and geographical mobility. Objectives: The objective of this paper is to examine the impact of certain labor market indicators on personal income taxation in Federation of Bosnia and Herzegovina (FB&H). Methods/Approach: Since personal income taxation consists of a very broad definition and for the purpose of this research only, income from dependent (employment) activity is observed. The econometric analysis is conducted using error correction modeling, as well as forecast errors variance decomposition. Results: The error correction model is estimated, and the cointegrating equation indicates that monthly wage and number of employees statistically significantly positively affect personal income taxes in FB&H in the long-run. After two years, the selected labor market indicators explain a considerable part of forecasting error variance of personal income tax revenues. Conclusions: The implementation of reforms in the labor market and tax policies of the FB&H is suggested. In order to achieve necessary reforms, efficient governance and general stable political environment are required.

Keywords: error correction model; Federation of Bosnia and Herzegovina; labor market indicators; personal income taxation (search for similar items in EconPapers)
Date: 2019
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