Personal income tax hike € Not!

By bne IntelliNews October 4, 2013

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Russian Deputy Prime Minister Arkady Dvorkovich said on Sept 27 that personal income tax should be hiked to 15% from 13% after 2015 and that VAT should be reduced to 15% from the current 18%.

"If we need to reduce the VAT, and I think that it should be cut, if we are going to switch to a flat rate, then we have to think about a slight rise of the personal income tax. These two rates may be at 15% to make the system balanced," Dvorkovich said.

The comment caused an uproar. Russian President Vladimir Putin's overriding achievement, as far as the people are concerned, has been to slash personal income tax to a flat rate 13% - the lowest in Europe - on taking office in 2000. The income tax rate (and corporate profit tax at 24%) has been sacrosanct ever since. Low income taxes are the bedrock on which Putin's popularity is built.

But as the government is clearly on the hunt for money in the face of a shrinking budget surplus, at some point there will have to be some tinkering with the tax rates. The Duma took a half step in that direction this year by introducing a so-called luxury tax on very expensive things like posh cars.

Dvorkovich is worth listening to. He was deputy minister of economic development and then the economic advisor to Putin before taking up his current job, and is in many ways one of the chief architects of Russia's economic policy. Moreover, the western-educated Dvorkovich is not afraid to speak his mind and inject new ideas into the policy debate.

But this time it seems Dvorkovich went a step too far. The government's press service said bizarrely that Dvorkovich's comment on the personal income tax was "a play on words". Finance Minister Anton Siluanov followed up the next day to pooh pooh the idea, saying there were some hikes planned for petrol and tobacco and that was all.

The rather red-faced Dvorkovich was in front of the cameras again the next day. "It was just a joke," the obviously chastened Dvorkovich said the next day.

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