Annotation. Tax policy is one of the most powerful instruments of state economic regulation. It influences investment, consumption, income distribution, and ultimately, the pace and quality of economic growth. In Georgia, since the early 2000s, tax reforms have aimed to simplify the system and stimulate investment. However, despite solid economic performance, poverty and income inequality remain significant challenges. This paper examines the conceptual link between tax policy, economic growth, and poverty reduction in Georgia, emphasizing the need for an inclusive fiscal framework that supports both growth and social equity.

Keywords: Economic growth,Tax policy, Poverty reduction, Income Inequality,Inclusive Fiscal Policy

Introduction

Tax policy plays a dual role in modern economies: it serves as a fiscal tool for financing public services and as a regulatory mechanism that shapes investment and consumption behavior. In Georgia, tax reforms have significantly transformed the economic environment, establishing one of the most liberal tax regimes in Eastern Europe. Despite these achievements, social disparities persist, raising a crucial policy question: How can Georgia’s tax policy foster sustainable economic growth while ensuring poverty reduction and social inclusion? This study seeks to explore the conceptual and practical dimensions of tax policy as a driver of inclusive economic development.

Economic theory identifies two main dimensions of tax policy: Growth-Oriented Tax Policy and Redistributive Tax Policy. The Solow Growth Model and Endogenous Growth Theories suggest that fiscal policy, including taxation, affects long-term growth by influencing capital accumulation, innovation, and human capital investment. Georgia’s tax reforms, initiated in 2005, aimed to create a simple, transparent, and business-friendly system. The current system includes relatively few taxes, with low rates compared to global standards. At the modern stage, the tax system faces different challenges, whether it should be the proportional system in determining tax rates, or we should use the progressive system, from a general point of view, can be considered more fair. It is important, what part of the received incomes should remain with the private entrepreneur and what part should be collected as the tax. (Kakhniashvili  2023). It is also important to note that the effective functioning of the tax control system is a key factor in achieving national stability and improving the financial and economic situation of the country. (Kakashvili &barbakadze 2018).

Georgia has experienced steady growth — averaging 4–5% annually — supported by investment inflows, tourism, and construction. However, the poverty rate remains around 17–18% (World Bank, 2024).

Table N1

The table shows GDP growth, poverty rate, unemployment rate, and tax revenue as a share of GDP over a five-year period. The dynamics highlight existing inequalities, indicating that the benefits of economic growth were not distributed evenly across society.

Economic growth should directly reduce poverty and create social stability. However, this occurs only if income distribution is equitable. A growth-oriented policy that does not consider inequality will not achieve sustainable poverty reduction (Verulava, 2025). 

Table N 2 Economic Indicators of Georgia (2020–2024) 

 Sources: Geostat, IMF, World Bank

The table below presents the key macroeconomic and social indicators of Georgia over the last five years (2020–2024). Indicators include real GDP growth, unemployment, absolute poverty, and the Gini coefficient. n 2020, due to the COVID-19 pandemic crisis, Georgia experienced a sharp decline in Gross Domestic Product (GDP), which was accompanied by an increase in social challenges. During 2021–2022, the economy demonstrated a strong recovery with significant GDP growth; however, the benefits of this growth remained unevenly distributed among the population, highlighting persistent socio-economic inequality.

In 2023–2024, both unemployment and poverty rates declined, indicating improvements in the labor market and social conditions, although income inequality remained relatively high.

The year 2025 began with robust economic activity. In the first quarter, economic growth reached 9.8%, In the second quarter, the average growth rate was 7.1%, While in July, economic growth stood at 6.5%. Accordingly, the average economic growth rate for January–July 2025 was 8.0% (Ministry of Economy of Georgia, 2025).    The main contributors to this positive economic performance were the transportation and storage, information and communication, arts, entertainment, and recreation, and trade sectors. Additionally, exports increased by 9%, reaching USD 3.8 billion. A particularly positive trend was observed in the tourism sector: in the second quarter of 2025, travel (tourism) revenues increased by 5.0% year-on-year, reaching a record-high level of USD 1,145.0 million for the quarter. According to international financial institutions and rating agencies, Georgia’s economy has maintained its resilience as a result of prudent macroeconomic policies. In its April 2025 update, the International Monetary Fund (IMF) revised downward its global and European economic growth forecasts but raised Georgia’s growth forecast from 6.0% to 7.2%, reflecting the country’s resilience to external shocks.

According to the IMF’s medium-term projections, Georgia is expected to have the highest economic growth rate among regional and European countries in the 2025–2030 period, averaging 5.4%.

Despite the positive trend of economic growth, income inequality and poverty remain serious challenges. To effectively reduce poverty, Georgia needs to shift from a liberal model to an inclusive fiscal policy framework that emphasizes equity, productivity, and human capital development.

A well-designed tax system plays a crucial role—both directly and indirectly—in reducing poverty, through progressive taxation, targeted benefits, and social investments that promote inclusive and sustainable development.

It is important to analyze the tax systems of the countries in the region, which are presented in Table 3. 

Table 3.  Comparative Overview of Regional Countries

The table demonstrates that the lowest GDP growth rate (3.1%)is observed in Czechia, although the poverty rate is also relatively low (9%). Poland shows similarindicators. Notably, both countries apply progressive taxation systems, which may contribute to more equitable income distribution.

In contrast, Georgia’s case illustrates that economic growth alone does not guarantee social stability. To effectively reduce poverty, the state must employ additional instruments such as progressive taxation and targeted fiscal mechanisms.

An important issue remains how to design and determine optimal tax rates in a way that does not reduce individuals’ incentives to increase income as a result of higher taxation levels (Kakhniashvili, 2023).

Conclusion

The analysis of Georgia’s economic performance from 2020 to 2025 demonstrates that robust GDP growth alone is insufficient to ensure social stability. While the country has achieved impressive growth rates—especially in 2025—the benefits of this growth remain unevenly distributed, and poverty and income inequality persist as significant challenges.

Comparative evidence from regional countries highlights the importance of progressive and well-designed fiscal policies. Countries such as Poland and Czechia, which combine economic growth with progressive taxation, maintain lower poverty rates despite moderate GDP growth, illustrating the effectiveness of fiscal mechanisms in promoting inclusive development.

For Georgia, the findings suggest that shifting from a liberal or semi-liberal tax model to an inclusive fiscal framework is essential. Such a framework should prioritize equity, productivity, human capital development, and targeted social investments. At the same time, careful consideration must be given to setting optimal tax rates to avoid reducing incentives for income generation.

In conclusion, the synergy between sustained economic growth and inclusive fiscal policy is key for achieving long-term social stability and poverty reduction in Georgia. Without deliberate policy measures, growth alone cannot guarantee equitable outcomes or address persistent social disparities.

  The analysis of the current reality shows that, despite the successes of a liberal tax regime, there is a need for a more inclusive fiscal approach, which ensures social equity and promotes sustainable development. (Kakhniashvili 2023)

References 

Verulava, T. (2025). Economic growth, inequality, and poverty: Policy issues and challenges. Economic Profile, 20(1), 35.

Kakashvili, N., & Barbakadze, Kh. (2018). Mechanisms of tax control for the development of small and medium business. Batumi.

Kakhniashvili, N. (2023). Role of taxes in overcoming poverty in Georgia. Georgian Scientists Journal, 5(2). https://doi.org/10.52340/gs.2023.05.02.04

Geostat. (n.d.). Retrieved from https://www.geostat.ge/ka

Ministry of Finance of Georgia. (2024). Tax Policy Review of Georgia. Tbilisi: Ministry of Finance.

World Bank. (2024). Georgia Economic Update: Fiscal Policy and Inclusive Growth. Washington, D.C.: World Bank.

Ministry of Economy of Georgia. (2025). Economic Trends of Georgia: January–July 2025. Tbilisi: Ministry of Economy.

International Monetary Fund. (2025). World Economic Outlook Update: April 2025. Washington, D.C.: IMF.

UNDP Georgia. (2023). Inclusive Growth and Poverty Reduction in Georgia. Tbilisi: UNDP.

Organisation for Economic Co-operation and Development (OECD). (2022). Taxation and inclusive growth: Lessons from transition economies. Paris: OECD Publishing.

International Monetary Fund. (2023). Caucasus and Central Asia regional economic outlook. Washington, D.C.: IMF.