Russia » Economics
Author`s name Ольга Савка

Never Pay any Taxes?

The tax reform still causes controversy in Russia

The Prime Minister of the Russian government Mikhail Kasyanov decided to personally run the reform of the taxation system in Russia. As governmental officials say, Kasyanov is tired of waiting for the Finance Ministry and the Ministry for Economic Development and Trade to take an initiative about the reform. Secondly, it would be very good for the prime minister to run the reform successfully, for everyone would associate the ease of the tax burden with his name. Former Prime Minister Viktor Chernomyrdin gave a definition to the activity of a head of the Russian government, when he said "we wanted to do something better, but we got it as usual." Mikhail Kasyanov does not want to repeat the same thing.

Mikhail Kasyanov said today at a governmental session that the Finance Ministry and the Ministry for Economic Development and Trade are about to coordinate basic measures of the tax reform. As he said, the scheduled program would allow to reduce the tax burden on the economy by two percent of the Gross Domestic Product. This is expected to be achieved next year. Kasyanov also said that the burden would be eased most for the processing industry, since the government pays first priority to its development.

According to experts' estimates, the prime minister has prepared the today's statement very well. As it is known, Mikhail Kasyanov offered his opponents (Finance Minister Aleksey Kudrin and Economic Minister German Gref) his own tax reduction characteristics. The Ministry for Economic Development and Trade was given a task to calculate the influence that the 28 percent social tax flat scale would show on the economy (it is going to be introduced in 2004).

Experts were perplexed about such a radical approach to the tax reform. The repressive rate of the social tax was introduced in order to make wages legal in Russia. At present moment, an employer pays the social tax to the state on the base of the graded scheme. The higher the official wages of an employee, the lesser the amount of the social tax. The introduction of the flat scale will make employers get back to the so-called black and white system of paying wages. In other words, the change of the social tax rate was meant to encourage enterprises to run those activities in a legal way. However, Mikhail Kasyanov’s suggestion to levy the social tax will lead to an absolutely opposite result. Experts calculated that it would not be profitable for an enterprise to pay a legal salary that would be higher than $600. Analysts believe that the government hopes that large companies (which have already started paying wages to their employees legally) will not conceal real wages, taking a risk of an administrative responsibility. However, the point of the tax reform is not about the fact whether enterprises conceal their employees’ wages or not. It is about the fact that either each employee costs too much for the Russian business, or their tax burden is close to the level of 50 percent. This exerts negative influence on the competitive ability of the economy on the whole, impedes the economic development, as well as a lot of governmental social projections like mortgage, for instance.

Vladimir Kashin, deputy director of the State Scientific Institute of the Russian Revenue Ministry, believes that only gradual reduction of the social tax rate down to the level of 20 or 22 percent will allow to provide the development of the competitive ability of Russian producers.

In the countries of the European Union, social taxes do not exceed the level of 15 or 18 percent. Furthermore, their lower and upper limits are strictly determined. In Russia, Vladimir Kashin believes, one should set at least the minimum free of tax income on the living wage level. German Gref, the Minister for Economic Development and Trade, has been trying to explain that to the prime minister. Yet, Finance Minister Aleksey Kudrin is totally against such an approach, fearing lest the budget might get depleted. To all appearances, Mikhail Kasyanov is not interested in that, for the prime minister is more preoccupied with the development of his own political career.

Yet, Russian businessmen do not feel very enthusiastic about all that. For example, the Russian Union of Entrepreneurs and Businessmen is being rather sceptic about the prime minister's initiative, especially when it comes to the taxation system for large companies, who run the transparent practice of salaries. Experts of the Union calculated that the current social tax rate for large companies does not exceed the level of two percent. As a result of the reform, they will have to pay 28 percent. Pretty big difference over there. Businessmen and entrepreneurs believe that the social tax flat scale can justify itself only if the tax rate is fixed on the level of eleven percent. In this case, the taxation of wages will not exceed the income tax. Yet, it is obvious that neither the government, nor the prime minister will ever make such a decision.

To crown it all, the flat scale of the social tax rate will strike a serious blow on the pension fund of Russia. The fund will have to face greater obligations for those people, who receive legal wages. In case of a flat scale rate, pensions will have to be increased proportionally to wages. This will be a great hardship for the fund, it might be even ruined.

Kira Poznakhirko

Translated by Dmitry Sudakov