Source Pravda.Ru

Never Pay any Taxes?

The tax reform still causes controversy in Russia

The Russian government's prime minister, Mikhail Kasyanov, has decided to personally run the reform of the taxation system in Russia. Governmental officials say that Kasyanov is tired of waiting for the Finance Ministry and the Economic Development and Trade Ministry to take initiative about the reform. In addition, it would be very good for the prime minister if he runs the reform successfully, for everyone would associate the ease of the tax burden with his name. Former Prime Minister Viktor Chernomyrdin defined such activity on the part of a prime minister of the Russian government when he said that "we wanted to do something better, but things happened as usual." Kasyanov does not want to repeat the same thing.

Kasyanov said today at a governmental session that the Finance Ministry and the Economic Development and Trade Ministry are about to coordinate basic tax-reform measures. He said that the scheduled program would allow reducing the tax burden on the economy by 2 percent of GDP. (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 is giving its development first priority.

According to expert assessments, the prime minister prepared today's statement very well. It is known that Kasyanov has suggested his own tax-reduction agenda to his opponents (Finance Minister Alexei Kudrin and Economic Development and Trade Minister German Gref). The Economic Development and Trade Ministry was given the task of calculating the influence that the 28-percent flat social tax will have on the economy after it is introduced in 2004.

Experts were perplexed about such a radical approach to tax reform. The regressive social-tax rates were introduced in order to legalize salaries in Russia. At present, an employer pays the social tax to the state on the base of a graded scheme. The higher the official wages of an employee, the lower the amount of the social tax. The introduction of a flat rate will make employers go back to the so-called "black-and-white" system of paying wages. In other words, the change in the social-tax rate was meant to encourage enterprises to run their activities in a legal way. However, Kasyanov’s suggestion as to how to levy the social tax will lead to the absolutely opposite result.

Experts calculate that it will not be profitable for an enterprise to pay a legal salary that would be higher than $600 a month. Analysts believe that the government hopes that large companies (that have already started paying wages to their employees legally) will not conceal real wages and take the risk of administrative responsibility. However, the point of the tax reform is not about whether enterprises conceal their employees' wages or not. It is about the fact that either each employee costs too much for Russian business, or their tax burden will be close to 50 percent. This exerts a negative influence on the competitive ability of the economy on the whole and impedes economic development, as well as many state social-projection systems, such as mortgages, 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 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, Kashin believes, one should set at least a minimum free-of-tax income at the living-wage level. Gref has been trying to explain this to the prime minister. Yet, Kudrin is totally against such an approach, fearing that the budget might become depleted. To all appearances, Kasyanov is not interested in the subject, for the prime minister is more preoccupied with the development of his own political career.

Russian businessmen do not feel very enthusiastic about the subject. For example, the Russian Union of Entrepreneurs and Businessmen is rather skeptical about the prime minister’s initiative, especially when it comes to the taxation system for large companies who pay salaries in a transparent way. Union experts have calculated that the current social-tax rate for large companies does not exceed the level of 2 percent. As a result of the reform, they will have to pay 28 percent. That’s a pretty big difference. Businessmen and entrepreneurs believe that a flat social-tax rate can justify itself only if the tax rate is fixed at the level of 11 percent. In that case, 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 top it all off, a flat social-tax rate will strike a serious blow to Russia's pension fund. It will have to face greater obligations for people who receive legal wages. In the case of a flat rate, pensions will be increased proportionally to wages. This will be a great hardship for the fund, which might even be ruined.

Kira Poznakhirko PRAVDA.Ru

Translated by Dmitry Sudakov