Russia's Duma receives draft bill on progressive income tax with 70% top rate

Russia's Duma receives draft bill on progressive income tax with 70% top rate
Russia's Duma, elections for which will be held in September.
By Ben Aris in Berlin August 11, 2016

In what is probably the clearest sign yet that the Kremlin is starting to panic over the dire state of the federal budget and needs to make painful reforms, two members of the flamboyant and populist Liberal Democratic Party of Russia (LDPR) submitted a bill to the Duma that will introduce a progressive income tax regime with a 70% rate for top earners.

The move is the first time that anyone has suggested increasing income taxes in over a decade and half, and strikes at the basis of the edifice of prosperity that President Vladimir Putin has built his popularity on. Amongst the very first things Putin did on taking office in 2000 was slash income taxes to a flat 13%, one of the lowest rates in Europe, where they have stayed ever since. The fact this bill is being introduced just over a month before a crucial general election – although it won't be debated until after the election is over – is also a shocker.

But the government has little choice. As bne IntelliNews recently wrote, the government is on the hunt for RUB2 trillion ($31bn) of revenue to plug a federal budget deficit expected to reach 4% of GDP this year – and after months of crunching the numbers it has run out of options. The only way to raise this kind of money will be to raise taxes from their already very low level.

This bill has been in the works for a few months. Russian Prime Minister Dmitry Medvedev dropped the mini-bombshell by announcing Russia will introduce a preferential tax regime in June, but remained vague on when the new regime will be introduced.

“We need to reconfigure the tax system so that it not only raises money for the budget, but also stimulates the creation of advanced, competitive products and services outside the raw materials sector, to strengthen the balance of regional and local budgets, helping them create new sources of revenue,” Medvedev told delegates at a conference of the ruling United Russia party on June 27.

The draft law was submitted by members of the LDPR – a party that is noted for its loyalty to the Kremlin as well as for the buffoonery of its leader, virulent nationalist Vladimir Zhirinovsky.

The main change will be to scrap the flat tax regime of 13% for everyone regardless of income. Citizens with a combined annual income of up to RUB180,000 ($2,788) will be exempted from tax entirely, while those with an income of between RUB180,000 and RUB2.4mn ($37,193) will continue to pay the 13%.

The upper tax brackets are targeting the wealthy. For individuals earning over RUB2.4mn up to RUB100mn ($154,938), the proposal is for them to pay a flat rate contribution of RUB289,000 ($4,478) in addition to 30% of any income over RUB2.4mn of income.

But it is the super wealthy that will be hit hardest. For anyone earning over RUB100mn, the proposal is they pay a flat rate contribution of RUB29.6mn ($458,670) and then 70% of their income on any amount in excess of RUB100mn.

According to the LDPR deputies, these rules would mean that 35mn low-income workers who are currently paying 13% on their salaries would be exempt from income tax entirely. But more importantly, the tax take from income tax payments should double as a result. In 2015 the federal authorities collected a total of RUB2.8 trillion ($43.4bn) of income tax, but the deputies estimate that with the new sliding scale income tax revenues would increase to RUB4.45 trillion – and provide the missing RUB2 trillion the government is so desperate to find.

Politically this should not be too tough a sell, as low-income groups will be clear beneficiaries whereas the bulk of the middle class will be unaffected. It is assumed that if the bill "On Amendments to Chapter 23 of the Tax Code" is adopted, the law will come into force on January 1, 2017, reported Vedomosti