Presenting the Government's report to the State Duma last week Vladimir Putin confirmed the Government's commitment to the flat income tax rate introduced in Russia in 2001. "On the face of it, of course, this is not very fair," he admitted, but he chose not to try to convince the deputies that it was fair "on closer inspection." The Prime Minister rolled out two arguments. First, he noted "when we introduced the flat scale, tax revenue increased by 12 times in eight years." Second, he mentioned abuses and admitted that "we do not administer this properly: most probably... if we go back to the differentiated rate... no social justice will result".
It is a pity that the Prime Minister does not believe in effective administration. Why then, has the number of civil servants and security in the country increased by more than 50% in the last eight years? More importantly, in times of crisis stability is not measured in terms of the amount of tax collected. It is determined by whether citizens feel that they live in a fair society. When money becomes scarce, the price of justice grows.
Let's review world practice. No one has ever liked paying taxes, especially in countries where people consider themselves to be free. In 1895 the US Supreme Court declared income tax unconstitutional. To reintroduce it in 1913 the 16th amendment to the Constitution had to be adopted and ratified. However, until the mid-1920s it was not taxes but customs duties (like with Russia today) that yielded almost half of the budget revenue.
What brought about a change? The Great Depression. It brought home to the authorities that in a country where there is no justice there will never be social peace or a middle class or a stable economy. The upper limit on the income tax, which stood at 24% in 1928, was raised to 63% in Franklin Roosevelt's first presidential term, to 79% during his second term and to 91% in the mid-1950s (a month ago Congress restored the 90% tax on the bonuses of company executives which enjoy government support). The inheritance tax was raised from 15% to 77%. What was the result? The New Deal created a new America, a country where the middle class was the core of society and the number of billionaires dropped from 32 in 1928 to 13 in 1968.
Russia today finds itself in not the best of company. A flat income tax rate exists only in Ukraine, the Baltic states, the Czech Republic, Bulgaria, Romania and Montenegro. None of these countries are leaders in terms of economic development or social guarantees. All the leading powers have a progressive tax scale with the lowest differing from the highest by 3-8 times.
Do we need such justice? Consider the facts. In 2008 the average wage in Russia was 15,000-17,000 roubles a month. If you add in extra income it is 20,000-22,000 roubles, or 240,000-270,000 roubles a year. A Russian has to pay 13% tax. Nothing to write home about. In Japan such an income is taxed at the rate of 5%, in France 5.5%, in Brazil 7.5% whereas in socialist Finland tax begins to be collected from incomes in excess of 12,600 euros a year. However, the maximum rates in these countries are respectively 50, 45, 27.5 and 35% and are applied to incomes beginning at $80,000-100,000 a year. How many Russians have such income? No more than 2-3%. That is why rich people across the world envy us. As for the number of billionaires, over the past eight years we have outstripped all countries except America, although now many of them are being bailed out by the government.
You may wonder why. Because it was only in Russia that company owners paid 100% of the enterprise profits in dividends in 2006-2007, while borrowing abroad to finance "development." Besides, Russia is one of the few countries where dividends are equated with other income taxable at 13% and not 35% as in the US or 40-60% as in Europe (in the EU where companies have always earmarked more for development while keeping the shareholders on a lean diet there are fewer complaints about lack of credit today).
All this is economics. In the coming years our rich people cannot count on dividends. And most Russians will probably have to take wage cuts. So, the oligarchs would not lose all that much from a higher income tax while ordinary people would get much needed money if the tax is cut (or abolished). It is high time to revise the former practice, which has been dropped by most countries. What better time to do so than in a crisis, especially if our leaders are not oligarchs. In Russia the leaders are not oligarchs as witnessed by the income declarations the president and the prime minister published last week. So, there is no point in clinging to the symbols of a past era.
By Vladislav Inozemtsev