Page 19 - bne IntelliNews Newspaper 280417

Opinion
April 28, 2017 www.intellinews.com I Page 19
by an increase in the tax rates for items such as cigarettes and alcohol. Taxes on other items such as palm oil and sugary drinks were discussed but ultimately not included for now. To note though, excise taxes do not net the state much cash: only RUB632bn in 2016, some $11.3bn. On the opposite side, mineral tax revenues decreased markedly as oil prices plunged. VAT revenues increased, but the tax itself did not change: authorities improved collecting the tax, but the actual rate itself (18%) remained constant.
While oil revenues are critical for the Russian economy, the average working Russian likely has little interaction with the mineral extraction tax. For him or her, the most relevant taxes are the VAT, their income tax, and insurance premiums paid by their employer directly into Russia’s non- budgetary funds (essentially a payroll tax that feeds the local social security program). In their simplified form, the current rates for each tax are 13%, 18%, and 30% respectively.
Enter the tax manoeuvre, a plan that would ef- fectively shift burdens within the tax system, increasing the VAT, while reducing the burden
on employers. Though the exact parameters of the manoeuvre have not been decided – it re- mains unclear whether negotiations are even happening right now – the VAT would be raised
to somewhere between 20-23%, while insurance premiums would be reduced to a similar range (hence the 20/20). There has been talk, although in much less concrete terms, of increasing the in- come tax to 15% along with introducing a minimal taxable income level: effectively an implementa- tion of a quasi-progressive tax system.
Kirill Nikitin, partner at consultants PWC and professor of tax policy at Moscow State Univer- sity (MGU), explains the changes in much more concrete terms, describing how they effect an average Russian worker, Ivan Ivanovich. Right now, Ivan has an income of RUB100, and after taxes (13%) he brings home RUB87. For each paycheck he receives, his employer contributes RUB30 (30% of 100) to Russia’s non-budgetary
funds. Assuming he spends all of his income and does not buy alcohol and cigarettes subject to heavier excise taxation (molodyets, Russians would undoubtedly tell him), he pays another RUB13 in value added taxes. Nikitin argues that Ivanovich’s effective tax rate is 43% (vs. an OECD average tax wedge of 36%): the total taxes paid are RUB56 (30 + 13 + 13), out of a potential in- come of RUB130 (his salary plus the insurance premium). Under the 21/21 arrangement, the overall tax burden would be reduced to 40%.
Accounts differ on the direct implications of the manoeuvre for the economy. Nikitin calculates that a 21/21 configuration would lead to a budget loss of RUB200bn ($3.56bn). The Ministry of Finance sees a 22/22 configuration as profitable, with the budget to gain RUB186bn extra ($3.31bn). Of critical note, however, are the indirect implica- tions of the move: employers would find it cheaper to hire employees. That could both stimulate the economy overall, as well as bring labour out of the shadows. Russia’s government continues to miss out on revenue from a large informal sector, which grew to a record size last year. With less ex- pensive employment costs, budget revenue from on-the-books employees could be significant – up to RUB500bn ($8.9bn), according to the Ministry of Finance.
On the other hand, few calculations seem to have been done on how an increase in prices (what
a VAT hike necessarily entails) might mean for consumers’ already sluggish demand, especially if real disposable income continues to contract. And the inflationary consequences of the hike (2.4% in the middle-term, per Nikitin) might not enthrall the erstwhile guardians of Russian mon- etary policy.
Long-term thinking
It bears note that talk of these reforms indicates a shift in focus by officials to the mid-term: the direct fiscal gains are small, which suggests that the measure is not about making ends meet,
so much as boosting growth in the longer term. None of these adjustments are planned until