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Regular version of the site

Tax hike could stifle economic growth

Russia’s planned tax increase could bring about slower economic growth rates and a drop in the ability of Russian companies to compete, experts from HSE’s Centre of Development Institute say in the latest issue of Comments on State and Business

Over the next several years, Russia can likely expect a new round of tax reform. Russia’s Finance Ministry is planning on returning to the practice of collecting a regional sales tax starting in 2015. In another year, the national insurance contribution rate for high wages could increase to cover the Federal Compulsory Medical Insurance Fund, and in 2019, value added tax and the personal income tax could grow. Experts from HSE’s Centre of Development Institute have analysed how the tax hike in question will affect the tax burden figures.

The tax burden has been calculated in Table 1 based on tax and non-tax revenues of the Russian budgetary system in 2011-2013. To assess the burden of taxation in Russia, the Russian figures are compared with analogous data from countries of the Organisation for Economic Cooperation and Development (OECD).

Table 1. Ratio of tax and non-tax revenues to GDP (%)

 

2011

2012

2013

Total budget revenues

36.6

36.7

35.8

Corporate tax

4.1

3.8

3.1

Income tax

3.6

3.6

3.7

VAT

5.8

5.7

5.3

Duties

1.2

1.3

1.5

Lump-sum tax

0.4

0.4

0.4

Property tax

1.2

1.3

1.3

Mineral extraction tax

3.7

4

3.9

Stamp duties

0.2

0.2

0.2

Foreign trade income

8.3

8

7.5

Use tax

1.2

1.3

1

Natural resources consumption tax

0.2

0.2

0.4

Revenue from paid services

0.4

0.3

0.3

Insurance contributions

6.3

6.6

7

Source: Russian Ministry of Finance

Average data on the tax burden in OECD countries are currently available for the year 2011. Such data show that Russia’s 2011 fiscal burden was higher than the average values for OECD countries and comparable to the tax burden of a number of countries in Central and Western Europe, such as the Czech Republic, Germany, Iceland, Slovenia and Great Britain.

In some developed European countries, in particular Scandinavian, the tax burden was notably higher than in Russia. In countries of Eastern and Southern Europe – Poland, Spain and Portugal – the tax burden was lower. Finally, in countries of the Pacific region and OECD countries, it was substantially lower. The latter group of countries includes both developed countries – the U.S., Australia and Canada – as well as developing ones, such as Mexico, Chili and Turkey. In Turkey, for example, the tax burden is nearly 10 percentage points lower than in Russia, while in Mexico it is practically two times lower.

In 2011-2013 the level of Russia’s tax burden changed only slightly amid notable structural modifications. In 2013 compared with 2011, the share of profit tax in GDP fell significantly, almost by a percentage point. Economic stagnation has brought about an increased number of loss-making enterprises. Decline was seen in the makeup of the overall tax burden for the share of VAT and revenues from the mineral extraction tax and insurance premiums.

The level of the country’s tax burden is distributed unevenly across sectors of the economy. It is significantly higher in the oil and gas sector, for example. In addition, experts estimate that the tax burden in the non-oil and gas sector of the economy was around 29% of GDP in 2011-2013.

Fiscal burden will grow 1.7% when the Finance Ministry’s tax innovations are carried out. Under 2013 conditions, the tax burden would total 37.5% when this figure is calculated using ‘traditional’ methods. If plans to implement a sales tax are abandoned and the limit becomes nothing but increased VAT, then the tax burden will advance by just 0.6%.

Table 2. Increase in tax burden under Finance Ministry's planned tax hike (% of GDP)

Total revenues

1.7

Income tax

0.56

Value added tax

0.58

Insurance contributions

0.3

Sales tax

0.26

Source: Russian Ministry of Finance

An increase in taxes will bring about slower rates of economic growth, as well a drop in the economy's competitive ability, the experts conclude. On the other hand, higher taxes allow for the country to lower the budget deficit and increase spending, or at least to do away with tiresome and hopeless measures to raise spending efficiency.

Figure 1. Ratio of tax and non-tax revenues to GDP for OECD countries in 2011 (%)

 

Source: Russian Ministry of Finance

Andrei Chernyavsky

 

July 30, 2014