Tax reform, including an increase in VAT and lower premiums, not increase the competitiveness of Russian business, but will contribute to the growth of poverty, experts say the Academy and the Gaidar Institute
The idea of lowering insurance premiums while increasing VAT (fiscal devaluation) will not be able “to exert a significant influence on the competitiveness of the Russian economy,” they write in the monitoring of the economic situation economists of the Ranepa, the Gaidar Institute and the foreign trade Academy under the Ministry of economic development. Thanks to this maneuver, GDP will grow, ceteris paribus, only 1% — 0.7% in the first year of the manoeuvre and 0.1% in each of the next three years.
Reduction of contributions from the current 30% and the VAT increase from 18% in different configurations discussed in the government since last year. In mid-March, the Minister of Finance Anton Siluanov said that the authorities decided to “22/22”. This will contribute to more rapid and sustainable economic growth, create a competitive environment that will rehabilitate the economy, explained Deputy Finance Minister Vladimir Kolychev. For the budget maneuver will be neutral, he said.
Fiscal devaluation is a quite popular practice in many countries, although, for example, in OECD countries it often implies a reduction of income tax, not to work, the authors note. In EU countries this measure has become “a kind of last way to stimulate the economy”.
Whitewash will not
The whitewash of the labour market, the tax maneuver will not help, analysts say. In theory when you lower rates of insurance contributions the business must reduce the use of envelope schemes, but in fact legalization will prevent the distrust of the pension system and “short-term” impact of reduced contributions on competitiveness. For example, from 2000 to 2011 the effective tax rate on labour decreased, but the share of shadow wages is still growing.
In General, the rates for social contributions in Russia are “extremely moderate”, although officials declare that they are too high, say the authors. International experience shows that reduction of contributions to reduce the cost of labor does not help (for example, in Chile in the early 1980-ies it was offset by growth in wages), says the review.
Maneuver will cause two divergent macroeconomic effect. On the one hand, the reduction of contributions will increase the demand for labor and, consequently, wages. On the other hand, the price increase due to the increase in VAT perjorative citizens from consumption goods to leisure, from-for what supply of labour, on the contrary, will decrease. “When the same money can buy less goods than before, then the value of wasting time at work becomes less. In this situation, rational behavior is inclined to think that it redistributes the time in favour of leisure,” explains the author, leading researcher of Gaidar Institute’s Ilya Sokolov.
Such effect is possible in theory, but in practice react to a price increase citizens have different, they may begin to work harder, says head of the Economic expert group Evsey Gurvich. However, the effect of the increase in labor demand will still be stronger than the effect of reducing the supply of labor, noted in the review of the Ranepa. This means that the actual number of hours worked in the economy will increase and competitiveness will increase.
Poverty due to VAT
In this second part of the tax maneuver — increase VAT, carries with it the risk of raising prices (by 3% in the growth rate of tax to 21%) and further growth of poverty. Most expensive products are now subject to a reduced rate of VAT of 10%, namely, basic foodstuffs, medical and baby products, products for children. The Finance Ministry cited a different estimate for inflation: according to Siluanov, one-time price will grow by 2% due to the tax maneuver.
The cost of production, companies that operate preferential tax regimes will increase. They do not pay VAT, therefore can not accept the deduction of input tax, therefore it is necessary to take into account the price of purchased goods and services. To combat this effect, the authors write, it would be possible with the help of voluntary registration as VAT payers.
The maneuver can prevent and imports: average rate of VAT (17.5%) now slightly lower than in Russia, and if the scheme is still applied, the gap will increase. Close to the Russian and rates in the countries of the main partners from abroad. The VAT rise “carries additional risks, including the risk of deterioration in availability, which has no analogues in Russia of high-tech equipment and machines”, according to the report.
Experts suggest to consider tax reform in other species to raise VAT, but not to reduce insurance contributions and income tax. “First, the effect in this case is stable. Second, the result will be an increase in investment resources at enterprises and simultaneously strengthen incentives for investment. […] Thirdly, there is the possibility to centralize the tax rate of the profit tax and the tax cut to spend the expense of purely regional components”, they explain his proposal. The increase in VAT experts propose distributed among regions in proportion to the number of inhabitants in order to avoid a shortfall in income.
But such a scenario is “inertial enough” — GDP growth of at least 1.5% in this case will only happen for 15-20 years. Because of this, “definitely make the choice in favor of holding such a tax maneuver in the oil and gas sector is not possible.”
Not the only alternative
The format of the maneuver previously prepared by the state Duma, the Federation Council and the chamber. Instead, the growth of VAT they propose to introduce a sales tax, without specifying, however, its specific parameters. This option, however, is complicated by the decision of the constitutional court, which in 2003 recognized unconstitutional the imposition of a tax on the value of goods that are bought by individual entrepreneurs.
The Ministry of Finance is the theme of the new tax was then called “premature.” Deputy Minister of Finance Ilya Trunin called the sales tax “yesterday”. At the same time, according to him, the authorities discussed the introduction of the sales tax, which could be tied to revenues.
To prepare changes in tax system requested President Vladimir Putin to come into force they should in 2019. The government can and does refuse to change the tax system, said the first Deputy Prime Minister Igor Shuvalov. Not to change anything, requested the representatives of big business, and this is an option, although the debate is yet to come, he said. Public discussion of the tax maneuver prematurely, in March said Putin. On a professional level, the discussion should be, however, to bear in the media before deciding its not worth it, he said.