Russia to Remain a Land of the Flat Income Tax

Love it or hate it, but a flat income tax is close to the core of what Putin's Russia is

Russia will not introduce a progressive income tax system, First Deputy Prime Minister and Finance Minister Anton Siluanov said on October 29, but admitted Russian inequality inequality is too high. 

"We are told: 'let's adopt a more progressive tax system for our citizens'. There are pros and cons to this. We know that rich people are clever, and they will find ways to circumvent this decision. They can just take the money out of the country. On the other hand, the flat rate of 13% has already been settled, and it would probably be wrong to change legislation in this regard," Siluanov said.

"One cannot not agree with the fact that income inequality creates social tensions. We are often told: 'let's raise taxes for the rich'. In fact, we have already done it — raised taxes on luxurious properties, cars, yachts, apartments and so on," Siluanov said.

Russia’s Ministry of Finance is looking for new sources of revenue, however, the flat tax on personal income that President Vladimir Putin introduced in his first term of office in 2000 has been sacrosanct ever since.

Income taxes remain the main source of income for Russia’s regions along with VAT. The government is shy of touching the income tax rate after the furore that followed its decision to increase retirement ages this summer, along with a parallel increase in VAT from 18% to 20%.

However, a hike in income taxes could be justified as Siluanov said in the same interview that Russia is becoming one of the most unequal countries in the world in terms of income.

The wealthiest 10% of people in Russia now own 82% of the country's wealth, TV presenter Vladimir Pozner said to Siluanov during an interview on Russia’s First Channel, quoting a report by Credit Suisse. He asked the minister if the government was going to do something about the fact that there was a big income gap in Russia. “One cannot but agree that the difference in incomes, of course, creates tension in society,” Siluanov replied.

The increase in VAT was partly designed to address the income differential as it selectively affects the rich more than the middle class. However, those at the bottom of income pyramid are likely to feel the most pain as their incomes are already insufficient to cover more than the basic cost of living.

Siluanov noted that salaries and pensions should be raised, and recalled that, according to statistics, young people with one or two children have the smallest income in Russia: “They need to be helped the most.”

While income taxes are a flat rate there are already progressive rates of tax on property, with rates being higher on expensive properties and on cars worth more than RUB3mn ($45,600).

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