21:49 GMT +321 March 2018
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    Is Russia ready to heavily tax the rich?

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    MOSCOW. (RIA Novosti economic commentator Nina Kulikova) - A bill to re-introduce a progressive income tax has been recently submitted for consideration by the State Duma.

    The Russian authorities have guaranteed a flat tax until 2011, but periodically it has been a target of attacks by different political forces.

    Russia's 13% income tax is one of the world's lowest. Praised as one of Putin's major economic achievements, it allows the government to talk about the success of its reforms and stability of taxation as a sign of a better business environment.

    Russia introduced a flat tax in 2001 in order to collect more taxes, and bring wages and salaries out of the shadow. When the nation was learning the ABCs of the market, the economy was ground down by taxation. In most cases, salaries were paid under the table, and taxes were simply ignored. Otherwise, both individuals and businesses would find it very hard to survive. The government introduced a progressive income tax in 1992, but collected less than half of all taxes.

    Elimination of the progressive tax had its effect - more salaries began to be paid legally, and, in some estimates, the tax collection more than doubled. Moreover, a flat tax was much easier to pay, and its introduction facilitated the stabilization of Russia's tax system as a whole.

    But since then, some politicians have insisted on reverting to a progressive tax. Last summer, head of the Russian Audit Chamber Sergei Stepashin said Russia might re-introduce it in 2008-2009. Speaker of the Duma upper house Sergei Mironov has backed this view.

    Recently, the Fair Russia faction suggested that no taxes should be deducted from monthly incomes below $190. The other categories should pay as follows: between $190 and $380 - 10%; from $380 to $3,800 - 13% (as now); from $3,800 to $11,300 - 20%; and beyond that - 30%.

    On the one had, this idea is sensible. Social justice demands that the rich and the poor should pay taxes commensurate with their incomes. A flat tax means that in relative terms, the poor are paying more than the rich, which further widens the huge gap between them. Today, the top 10% earn 15 times more than the 10% at the bottom.

    Progressive taxation means that the lower the income, the smaller the tax, and vice versa. The majority of countries employ this system. The highest income tax reaches 48% in Spain, and exceeds 50% in Germany, Japan, and France.

    But is Russia ready to adopt this practice? After total tax evasion, people have just started learning to pay the government its due. Progressive taxation may bring back "grey" salaries, when taxes are paid only on a fraction of the income. Apart from the budget, this will affect the pension system, which will receive less from the Unified Social Tax. But the Pension Fund is already funded from the budget by 30%.

    Also, the majority of super-rich receive their money through tax-free dividends. Some experts suggest introducing a progressive tax on property rather than incomes. Head of the presidential expert department Arkady Dvorkovich said that mansions, land, million-dollar apartments, yachts and cars should be subject to luxury tax, as is done all over the world.

    The Russian middle class, which has recently become more confident, will be the hardest hit by progressive taxation. It has become a catalyst for the rapid growth of retail trade, consumer credits, and mortgage. If this class goes back into the shadow, crediting will slow down, because it only thrives on legal incomes.

    It is not an axiom that progressive taxation will help bridge the income gap. In industrialized countries the governments are reducing the poverty level with a whole range of social measures rather than merely by taking heavier taxes from the rich. Conversely, Russia does not yet have a comprehensive approach to fighting poverty despite its oil-fueled budget surplus for several years. Experts estimate that the share of shadow salaries has dropped, but is still between 20% and 40%. It will take several years to legalize wages and salaries. Last but not least, when flat taxation was adopted in 2001, the authorities promised that there would be no changes for at least 10 years.

    Therefore, the Russian government is unlikely to revert to a progressive income tax in the near future. Finance Minister Alexei Kudrin said that this task is not for the foreseeable future. But once the capital comes out of the shadow, this may be a possibility. Minister for Economic Development and Trade German Gref made this comment: "Sooner or later we will have a progressive tax. But we do not plan it until 2010. It may come back after 2010, but it will be up to the new government and the new president to decide when."

    The opinions expressed in this article may not necessarily coincide with the views of the editorial board.

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