"Small tax maneuver" (or so-called fiscal devaluation) has been actively discussed in the economic block of the Government recently. The maneuver implies shifting the tax burden on business towards indirect taxes by raising the basic rate of VAT and reducing the profit tax rate or insurance premiums.
This kind of maneuver was carried out in a number of OECD countries (Germany, UK, Spain, Portugal, Hungary, Poland, Greece, New Zealand) in 2006–2012. It aims to increase the stability of tax revenues through VAT which is more resistant to fluctuations in economic conditions and external shocks, while providing additional tax incentives for businesses by reducing the income tax for companies.
Possible reduction of insurance premium rates instead of profit tax is Russia’s novelty.
It should be considered that VAT increase will inevitably lead to a one-time surge in inflation. Besides, the effect from VAT increase will vary for different industries: those industries that are exempt from VAT (the financial sector: banks, insurance, etc.) and exporters (VAT 0%) will benefit.
The exact parameters of the tax maneuver are yet to be determined: what direct taxes should be reduced – profit tax or insurance premiums, by how many percentage points will the rates change, and whether the maneuver will be budget neutral. So, the option “21/21” (VAT and insurance payments at the level of 21%) discussed in the press means that the budget will lose hundreds of billions of rubles – considering the huge budget deficit in the Russian Pension Fund and growing pension liabilities of the state.
When calculating the parameters, strategic directions of Russia’s economic development should be taken into account, including the architecture of the pension system, possible changes in budget expenditure commitments, etc.
Svetlana Shatalova – Senior Researcher