Negative selection: why Russian have bad taxes

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Of the 72 regions that received subsidies from the Federal centre in 2016, most could do on their own, if the powers to collect taxes would be distributed more rationally

Despite the President’s last address to the Federal Assembly start discussions on the revision of the parameters of the tax system, the recent Russian investment forum in Sochi tax topics ignored (for private with the exception of the tax regime for self-employed). But one of the Central sessions of the forum, with an all-star cast, including Deputy Prime Minister Dmitry Kozak and Minister of Finance Anton Siluanov, was on intergovernmental fiscal relations, that is, the distribution of Federal money between the subsidized regions of the Federation.


Of course, first and foremost, this substitution says a lot about the forum turned into a regular meeting of the regional elites to communicate with Federal authorities. However, there is a deeper reason for the regular substitution of public discussion about the tax system (and, in particular, the distribution of tax revenues and powers between the Federal, regional and local levels) discussion of intergovernmental transfers. It is the creation and strengthening of the tax system, inadequate not only to the formal status of Russia as a Federation, but its actual status as the largest unitary state in the world. According to the apt definition Kozak, this early in the last decade, the Russian tax system — a system of small unitary state, characterized by extreme centralization of cash flows and of powers at the Federal level.

In fact, while the majority (22 of 32) of OECD countries over the last 20 years had a radical decentralization of fiscal systems (and none of them was moving toward centralization), Russia, and characterized by high level of centralization of the fiscal system in the last 12 years, “made” the reduction of own revenues of the Federation in the consolidated budget by 15 PP (more than 3 p.p. of GDP).

In the result, in 2016, very good for the regions due to the recovery of proceeds of income tax, 72 of the Federation of the 85 received grants for leveling the budget supply. In other words, only 13 regions have provided themselves with their own income (and partially borrowed funds). A list of self-sufficient entities from year to year varies a little, but the most stable there are two capitals, their region, Tatarstan, Samara, Tyumen region, Khanty-Mansi and Yamalo-Nenets Autonomous district.

At the same time from recipients of Federal subsidies, only 15 subjects are sverhodarennym, consuming up to half of the total subsidies, the remaining subsidies smeared uneven thin layer in six dozens of regions that are not subsidized because of the depressed state of the economy or geographical conditions, and primarily due to the centralization of the fiscal system.

According to calculations based on the data of 2016, the decision on the allocation of excise tax on tobacco (now enlisted in the Federal budget and the remaining thanks to a brilliant lobbying at a very low level — about 40% of the retail price of cigarettes in the who recommended level of 70%) in budgets of subjects of the Federation in proportion to consumption (and not production) would be sufficient to number of subsidized entities decreased by 32 units, that is less problematic sverhodarennym subjects more than half. If we add to this the Federal part of the excise tax on alcohol and 3 percentage points in the rate of profit tax payable to the Federal budget, the system of intergovernmental transfers would remain in demand for a real economic-geographical and social problems of those 15 subjects of the Federation.

However, such a situation clearly does not fit into the value system of the Federal government. Regions submit a request for the federalization of the fiscal system, manifested in particular in creating a variety of “extra budgetary funds”, which in voluntary-a compulsory order is funded by both citizens and enterprises. In fact we are talking about tax tools. Center in response provides the region with additional tax powers, that is, in fact, the increase in the tax burden, the actual or nominal. Among these instruments, has been received by entities starting in 2013, include the right of the transition to cadastral value in determining the tax base for tax on assets of organizations (in respect of retail and office properties) and citizens, the introduction of sales tax (only for cities of Federal significance), definition of labour cost of the patent for migrants, the adjustment mechanism of levying income tax on transactions of sale and purchase of residential real estate. And obviously, the search for new opportunities to establish additional taxes and fees continues, which begs the question, not whether to watch, how to use existing, before discussing the new one.

Data analysis conducted by audit and consulting firm PwC in the framework published in September 2016 of a rating of efficiency of tax policy of subjects of Federation on the use of regions of their powers in tax policy in comparison with the level of fiscal capacity and sources of deficit financing (grants or loans), confirms the thesis intuitively clear: the more subsidized is the subject of the Federation, the less the motivation to work with own tax base and the more he focuses on getting grants from the centre. So, five leaders of the rating (Moscow, Khanty-Mansiysk, Moscow oblast, Bashkortostan, Tatarstan) have used all the powers granted, and provide benefits not funded through grants or debt, and at the expense of own means. At the same time the five regions, the guard rating (Astrakhan oblast, Krasnoyarsk Krai, Smolensk oblast, Perm Krai, Murmansk oblast), chose not to use most of the powers granted, did not hesitate to provide tax benefits actually due to Federal subsidies and future generations.

It should be noted that from 2017 the Ministry of Finance has adopted the practice of concluding with the regions of the agreements on the conditions for granting of grants for alignment of budgetary security, causing them providing execution plans for the collection of own revenues, laid down in regional laws on the budget. That is correct, but should not be limited by such agreements. We must demand that the subsidized entities full use of own tax powers. In fact, we are talking about the implementation of the long proposed by the authors of the asymmetry principle of tax powers, in which the actors, neglecting the work with its own tax base and living off subsidies, in fact, deprived of some powers and forcibly impose the maximum certain elements of the tax system (for example, set the maximum rate of the transport tax for especially powerful cars — that many subsidized entities prefer not to do so as not to irritate his elite). While unsubsidized actors can use their powers of discretion (while doing it).

An important element of the new tax system should be stability in determining the distribution of tax revenues across levels of the budget system, perhaps enshrined in the Constitution. Constant revision, lack of subject confidence in their income, the constant attempts of the centre to take away the surplus of constituent entities of the “extra” lead not only to insecurity, but also stimulate have a surplus of constituent entities desire to create expenditure obligations under the “excess” income. Another behavior is “acting out back” under various pretexts, promises issued to investors on tax breaks on profit and property. The reason is the fear of return to the scarce subjects. Such a plot is unfolding now in one of the subjects, a recognized leader in attracting investment in the automotive industry.

Only not decrease

And here, of course, it is impossible not to mention another birth trauma of the Russian tax system is its full autonomy from the opinions of the voters. Both the regional and Federal level this is manifested, in particular, that never in the modern history of Russia good as the corresponding budget does not cause at least to discuss the issue of reducing taxes. Perennial surplus of the social insurance Fund of routine from year to year is taken into income of the Federal budget, instead of reducing the rates of contributions to the Fund. Oil revenues since the Ministry Kudrin went to the reserve Fund instead of reducing the tax burden on the economy. Not to mention the fact that the budgetary situation of a number of subjects of the Federation in 2016 it is allows you to cancel for a year or two the vehicle tax or to postpone for a couple of years before the worst, not the “best” time of the introduction of a tax on property of physical persons from the cadastral value. I hope similar options will appear on the agenda of public debate as a possible alternatives for the development of both the regional and Federal levels, providing citizens with a choice between a permanent increase of budget expenditures and independent, without state aid, the decision on where to spend the savings on tax money. What you need to do is a separate issue.

The authors ‘ point of view, articles which are published in the section “Opinions” may not coincide with ideas of editorial.

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