Income tax: a possible increase in the rate

Tax changes, in particular, feasible increase of the personal income tax (PIT) from 13% to 15% with simultaneous introduction of a tax-free minimum, was discussed at one of the first post-elections meeting with Dmitry Medvedev, the Prime Minister (tax – free minimum was not specified in the media).

The idea to amend the PIT has been discussed for years. A range of proposals related to the changes in the personal income tax is rather extensive. Earlier this year, it became known that the government was considering a possibility to increase the PIT rate up to 15% for individuals with the annual income of 7 to 10 million rubles. At the same time, there are views regarding the expediency of the PIT growth for all citizens and the retention of the flat income tax rate. In addition, two draft laws regarding the introduction of a progressive PIT scale are already under the State Duma consideration, i.e. submitted by “A Just Russia” Party on February 8, 2018 and by the Communist Party of the Russian Federation (CPRF) on March 28, 2018. Thus, the following four possible scenarios are currently being considered:

  • The introduction of a three-tier progressive scale, proposed by CPRF;
  • The increase of tax rates for individuals with high income, i.e. in the range of 7-10 million rubles and from 24 million rubles according to the scale proposed by “A Just Russia”;
  • The increase of the rate for all persons’ categories;
  • Retention of existing system.

As for the increase of the rate for all categories, then, the arithmetic effect equaling to additional 500 billion rubles or 0.5% of GDP will be accompanied by a reduction in consumption with the low investment activity due to the known structural issues. However, these additional receipts, which are basically not significant within the framework of all the fiscal revenues, and smaller, for instance, than the income from the tobacco tax, do not constitute a guarantee, because the rate increase will serve as a motivation to join the shadow economy. That said, there will be no more talk about the sustainability of the tax collection rate. Moreover, such a measure will not help to legalize the income of the informally engaged individuals.

In the context of the frequently tackled issue of poverty alleviation, it is important to take into consideration the fact that regional differentiation among the population’s standards of living is very strong in Russia.

According to calculations based on the Russian Statistics Service (Rosstat) data, the affordability of a fixed basket of goods and service as a share of its cost in the per capita regional income is varying from 27% in Yamal-Nenets Autonomous Okrug, having the highest living standard, to 35% in Moscow and almost to 92% in the Republic of Tuva with its lowest living standard. Consequently, such a measure will have a regressive effect and will only degrade the life of the most disadvantaged groups of people. Therewith, one could mention that the existing tax privileges prove sometimes to be inefficient. For example, as far as the VAT preferential rate is concerned, the analysis of the consumption based on the income groups shows that more than 50% of this implicit subsidy falls on 40% of the wealthiest groups of people, while not more than 19% of the ‘subsidy’ generated by the VAT preferential rate accounts for 30% of the most disadvantaged ones.

The fact that the PIT deductions will increase the dependence of the poor regions on the federal budget’s transfers and will not solve the poverty issue provides an argument against possible increase of the personal income tax rate accompanied by the introduction of a tax–free minimum.

Another argument against the increase of the personal income tax rate is the current global shift towards digital economy and its promotion in Russia. In accordance with the program “Digital Economy of the Russian Federation” approved by the decree No.1632-p of the Government of the Russian Federation dated 28.07.2017 and with the Plan of activities, it has been envisaged to set up conditions for stimulation of the digital economy’s development in Russia in compliance with the “Statutory Regulations” of the program “Digital Economy of the Russian Federation”. One of these conditions, for example, could be potential introduction of the PIT tax privileges for business angels, facilitation of the procedures required to obtain the Russian tax residence for the highly-qualified individuals, that is, the stimulation of the shift towards digital economy based on the PIT improvement. Consequently, the increase of the tax rate by 2% up to 15% is in conflict with the goal to stimulate the development of the digital economy in Russia.
The introduction of the progressive scale will not only bring the risks of the understatement of the tax base and the decline in the growth incentives, but also suggest a more complicated and costly system of administration with rather vague perspectives for filling up the budget.

In summary, it could be said that the increase of the tax burden in general and of the PIT in particular, should be considered last of all. It is necessary, first and foremost, to effectively use the existing tools of the fiscal system, improving specifically the targeting of the privileges, the system of the public procurement, and the organizational and economic procedures of the budgetary system as a whole, for example, introduction of the aspects of electronic healthcare, making the documents’ management less expensive and more expedient. Otherwise, speaking about the development of the tax system, the approach to its improvement should be comprehensive and suggest a multifaceted maneuver as far as the rates are concerned.

Elena Minina, Senior Researcher, Tax System Development Department,
Elisey Leonov, Researcher, Tax System Development Department


5 The data related to the personal income tax rate in the Republic of Belarus, the closest neighbor of Russia, have been provided for comparison. The standard income tax rate is 13%, however, the income received from the Park of the High Technologies is to be subjected to the 9% rate.