Unifying social contribution and VAT rates at 21% would be detrimental to the budget and economy
The proposal by the Ministry of Economic Development to reduce the rate of social contributions while simultaneously increasing VAT was not examined with the Ministry of Finance and could lead to a serious decrease in budget revenue, Minister of Finance Anton Siluanov said at the Russian Investment Forum in Sochi. He said all tax innovations should meet three sets of criteria: they should not alter the burden on business, they should stimulate growth in collections and they should help to simplify tax administration.
Deputy Prime Minister Olga Golodets also has a negative view of the proposed manoeuvre. «Any hasty decisions that are taken without proper calculation lead to negative economic results, not to mention social results», she said as quoted by Interfax. She said a «calm strategic model» needs to be developed instead of constant fundamental changes. «I fully advocate an evolutionary approach», she said.
The Ministry of Economic Development, headed by Maxim Oreshkin, has sent the government a proposal called the «21/21 tax manoeuvre» (other options include: 20/22, 22/22 and 21/22), which calls for reducing the social contribution rates from 30% to 21% while simultaneously increasing VAT from 18% to 21%. This idea was originally put forward by the Ministry of Finance when Oreshkin worked there as a deputy minister. It has been discussed since summer 2016.
The manoeuvre is designed to support exporters and in doing so to increase net exports and give a boost to economic growth: reducing labour costs enhances the competitiveness of exporters who do not pay VAT as the burden shifts to importers and the public. The effect is comparable to the devaluation of the national currency; hence such a manoeuvre is referred to as «fiscal devaluation». It is a theoretical recommendation by the European trio of creditors the European Central Bank, European Commission and the IMF for a number of Eurozone countries, which due to the single currency are unable to support their competitiveness by weakening their currency. Not a single country has fully implemented this manoeuvre, the European Commission and IMF point out, acknowledging that it is unable to have a substantial positive effect on the economy.
The 21/21 manoeuvre would lead to a RUB 548-billion decrease in federal budget revenue (0.6% of GDP), according to a working version of calculations provided by the Ministry of Economic Development. According to Alexandra Suslina from the Economic Expert Group, any configuration of the manoeuvre would lead to a loss of revenue: from RUB 180 billion under the 22/22 manoeuvre to RUB 600 billion under the 20/22 manoeuvre.
The manoeuvre means dismantling the pension insurance system, a high-ranking official said. Contributions to the Pension Fund would decrease and pensions would have to be funded from the federal budget. Moreover, the manoeuvre would accelerate inflation: increasing VAT by 1 percentage point would lead to growth in the consumer price index of 0.40.6 percentage points, which could also require additional budget spending on social support. In addition to its obvious shortcomings, it is also questionable whether the goals of the manoeuvre could be achieved: it would not likely facilitate support for exporters as the main beneficiaries would be agriculture, the public sector and the public administration sector, according to materials from the Ministry of Economic Development. Another one of the manoeuvres goals encouraging companies to emerge from the shadows due to a decrease in the social contribution rates is also unrealistic, a high-ranking federal official said, noting that zero is still less than 20%.
Russian President Vladimir Putin instructed the government to discuss proposals for a new configuration of the tax system throughout 2017 so that the necessary amendments could be made to the Tax Code in 2018 and could take effect in 2019. But now the president has requested that the process be accelerated, First Deputy Prime Minister Igor Shuvalov said at the Russian Investment Forum in Sochi. «We thought that we had until the end of 2017 to work on the tax bills. But now we can already see that the president is demanding and requesting that the work be carried out a little more quickly», Shuvalov was quoted as saying by Interfax. In addition to the manoeuvre with contributions and VAT, the reform of personal income tax is also under discussion. But all the current tax proposals are only suggestions, Shuvalov said. «Many experts have their own opinions about what VAT, the personal income tax or the corporate profit tax should be. But it only makes sense to discuss the general tax framework. As soon as we do this work, we will present it», he said.