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Progressive tax regime a double-edged sword for Russia

December 02, 2015, 17:49 UTC+3 Zamyatina Tamara
© Vyacheslav Prokofiev/TASS

MOSCOW, December 2. /TASS/.  The time is ripe in Russia to use taxes as an instrument to narrow the gap between the incomes of the super-rich and the low-income categories of citizens but a progressive tax regime should avoid destroying the middle class, experts polled by TASS said on Wednesday.

The A Just Russia party has submitted a bill to the State Duma on introducing a progressive income tax. Currently, Russia has a flat tax regime, under which both oil magnates and cleaners pay the same 13% tax on their incomes.

The A Just Russia party has proposed keeping the tax unchanged at 13% for citizens with their annual incomes of under 5 million rubles ($74,545) and raising it to 18% for earners of 5 million rubles to 50 million rubles ($745,450) and 23% for persons getting from 50 million rubles to 500 million rubles ($7,454,500). The party has also proposed that citizens earning even more should pay an income tax of 28%

Statistics show that the top 10% of Russia’s well-to-do people were 17 times richer than the bottom 10% in 2014. The top 10% of Russia’s richest people account for 30% of money incomes of the entire Russian population while the poorest citizens account for just 1.9%

The bill’s authors estimate that a progressive tax regime would help add 470 billion rubles ($7 billion) in tax revenues to the federal budget, which is quite a substantial sum, considering a budget deficit of 2.18 trillion rubles ($32.5 billion) projected for next year.

The flat tax system in Russia was introduced in the early 2000s, Director of the Strategic Analysis and Developments Department at Vnesheconombank Vladimir Andrianov said.

"The Russian government introduced a flat 13% income tax system for all citizens back in the early 2000s to improve the investment climate, stimulate business and raise tax collection. As a result, the period until 2007 was the best time for the Russian economy," Andrianov told TASS.

Now the flat income tax system does not meet the requirements of social justice, the financier said.

"Some 10-15 years ago, Russia did not see such a sharp stratification of society by income. There was a small group of oligarchs from the Forbes list incomparable with hundreds of today’s top managers of state corporations and businessmen with billion-ruble incomes. The introduction of a progressive tax regime for this small stratum in society would boost budget revenues and make the state more socially-oriented," the expert said.

But a progressive tax scale also has the reverse side of the coin, he added. "Business may hide in the shadows from taxes. The problem of tax collection will resurface as wages will be paid in envelopes. The most serious threat will be posed to the middle class as the economic growth driver and also to the investment climate."

"I would cancel the income tax on low-income citizens all together, leave the flat 13% tax regime for the middle class and introduce a progressive tax of up to 40% for the highest earners as is the case in most countries," the expert said.

"Another thing is that rich people in France, Sweden and Denmark know that their tax payments are spent on social allowances and infrastructure as everything is transparent there. However, it is difficult to control this process in Russia with its weakly-developed civil society," he added.

Co-author of the bill on progressive taxation, State Duma deputy from the A Just Russia party Oleg Nilov believes that the opponents of this initiative are defending the "golden one percent of the population," the "masters of life" who possess all the country’s riches.

"The bill is not aimed against the middle class. It has been developed to protect those 20 million Russian citizens who are living beyond the poverty line of 10,000 rubles ($149) and conscientiously pay the 13% tax on their meager incomes," Nilov told TASS.

According to the lawmaker, the federal budget should be replenished at the expense of wealthy people rather than the poorest layers of society or the middle class.

‘The government has now imposed a levy on heavy-duty trucks for using federal highways. This measure will help replenish the budget by 40 billion rubles ($597 million). Meanwhile, the progressive tax regime proposed by the A Just Russia party will bring hundreds of billions of rubles for the budget," the lawmaker said.

"Officials say that the rich will hide from the progressive tax scale and won’t be caught. But why does the country have dozens of supervisory, tax and law-enforcement bodies then? It is their task to bring tax evaders out of the shadow," the parliamentarian said.

TASS may not share the opinions of its contributors