The Gaidar Forum—2019: A Panel Discussion – “The Fiscal Policy as a Factor of Competitive Edge of the Russian Business”

On January 16, within the framework of the Gaidar Forum – 2019 Sergei Drobyshevsky, Academic Director of the Gaidar Institute delivered a key report at the panel discussion: “The Fiscal Policy as a Factor of Competitive Edge of the Russian Business”.

Sergei Drobyshevsky’s report was based on the research carried out by a team of authors of the Gaidar Institute and the Presidential Academy.
In his report, Sergei Drobyshevsky stressed that Russia’s tax system formed in the early 2000s amid completion of the transformational fall and prior to the period of appreciation of prices of oil was one of the first successful examples in the world of application of a flat scale of income taxation and if not an “ideal” one, it looked quite competitive as compared to those of other countries.

During the past six years, the main fiscal policy principles were as follows: preservation of fiscal conditions (the main tax rates), upgrading of the pattern and administration of individual taxes, as well as automation of tax administration as a whole. In the past ten years since 2009, in the World Bank’s Doing Business Rating, Russia has moved upwards from 134th place to the 53rd place as regards the “Taxes” component. The Russian tax system largely meets the criteria of the “optimal tax system”, however, there is a number of “myths” about it which cause heated debates both in the business community and in development and discussion of budget laws.  

To such “myths”, the speaker attributed the following: a tax burden in Russia was exceedingly high and taxes prevented investments.

According to the statistical data, in 2017 the effective average tax rate (EATR) in Russia was equal to 16.7% (21.6% on average in the OECD), while the effective maximum tax rate (EMTR) amounted to 7.9% (13.9% on average in the OECD). So, the speaker concludes: fiscal conditions for implementation of investment projects in the non-oil and gas sector are in no way worse than in most OECD and BRIC member-states.
Also, another “myth” was mentioned:  budget federalism issues are easy to solve by means of redistribution of tax revenues between different levels of the tax system.

According to the calculations of the authors’ of the report, the measures aimed at redistributing tax revenues, undoubtedly,  promote fiscal  self-sufficiency of regions, but do not solve the existing problems: a change in profit tax and income tax rates worsens inter-regional income inequality of regions; per capita distribution of a portion of the VAT or introduction of the sales tax reduces fiscal inequality, but to a lower extent than adjustment subsidies; a transfer of the severance tax and  water tax in the Republic of Kabardino-Balkaria at the rate of 100% reduces fiscal inequality, but increases regions’ fiscal revenues by the mere 0.3%. 

In this context, the speaker concludes that it is impossible to assign substantial additional financial resources to regions without promoting the level of differentiation of their fiscal capacity. Individual measures aimed at leveling of incomes can be proposed: per capita distribution of a portion of VAT revenues between regions, setting of a higher income tax rate, payment of a higher profit tax norm by a region to budgets and a 100% transfer of the severance tax and water tax to regions.

Also, there is a “myth” that the VAT weighs upon industries which produce goods with a high added value.

As was specified in the report, a transfer to a flat individual income tax scale in 2003 permitted to increase tax revenues and bring a portion of wages and salaries from the shadow. Note that only 5% of taxpayers in Russia receive high incomes to which an increased tax rate could be applied. In addition to that, the experience of taxation of controlled foreign companies demonstrates high mobility of the most high-income group of taxpayers in Russia. A potential for increasing income tax revenues is made up of a large number of privileges and deductions which are normally regressive ones (interests on deposits, purchase and sale of real property transactions and other). 

Consequently, with the existing macroeconomic realities and sociopolitical consensus taken into account a transfer to progressive individual income taxation in Russia would be inexpedient. Experts believe that preservation in the mid-term prospect of a 13% flat tax rate will yield a higher economic effect and produce greater efficiency in terms of administration. 

Generally, according to the authors of the report at least in the mid-term prospect (till 2025) it would be expedient to keep the main parameters of the fiscal policy unchanged. During that period, a “fine tuning” of each tax is admissible, but revision of the principal parameters of the tax system and the pattern of the main taxes should be carried out only in the long-term period.

The moderator of the discussion was Sergei Sinelnikov-Murylev, Rector of the Russian Academy for Foreign Trade and Scientific Director of the Gaidar Institute.

Participants in the debates were as follows: Dmitri Satin, Deputy Head of the Federal Tax Service; Ilya Trunin, Deputy Minister of Finance of the Russian Federation; Boris Titov, RF President’s Business Ombudsman; Alexander Shokhin, President of the Russian Union of Industrialists and Entrepreneurs; Sergei Shatalov, Advisor to the Director of NIFI of the Ministry of Finance of the Russian Federation.

One can get familiar here with the presentation to Sergei Drobyshevsky’s report.

One can get familiar here with a full text of the report: “The Prospects of the Fiscal Policy. Is There an “Ideal Tax System” for Russia?”

The video recording of the debates