The Rosbalt news service published an article yesterday about the Russian government’s new efforts to find more money to plug holes in the federal budget.
Officials at the Ministry of Finance have taken initiatives to find extra money. There are two options being considered: to reform the system of premiums [to increase the payroll tax] or to increase the value-added tax (VAT).
The problem with these proposals is that the government will end up driving more businesses underground. The shadow economy, which already makes up a large portion of Russia’s economy, will only grow larger. The Russian Presidential Academy of National Economy and Public Administration published a survey in July alleging Russia’s “garage economy” currently consists of about 30 million people (“40 percent of the economically active population”).
INSOR’s Nikita Maslennikov notes that companies would also be more likely to show lower wages on their books in an effort to avoid the higher tax bracket. He also thinks it is unlikely that the VAT will be raised because it would “increase the risks of failure to reach the [Central Bank’s] target of 4 percent inflation by the end of 2017. This would be a blow to the plans of the Central Bank and its apparent bid to tighten monetary policy.”
It would be better, Maslennikov continues, to “move in directions which are more neutral in terms of the tax burden and comfortable in terms of stimulating economic growth. That is the reduction of inefficient government spending and expansion of the state borrowing program by increasing the release of federal loan bonds [OFZs].”
There is also a proposal to get rid of the 13 percent flat income tax implemented early in Putin’s first term. But the authorities are hesitant to reintroduce a progressive income tax. Most likely because they worry about a backlash by their constituents. It would also likely again force more people to operate off the books.
The Rosbalt article concludes by asking who the government’s “next “cash cow”” will be.