The Flat Tax in Russia
May 30, 2010
Today we are archiving a series of blog posts by Alvin Rabushka, an
economist at Stanford who has been a flat-tax advocate from
the olden days when the only such example in the world was Hong Kong.
His book The Flat Tax was
first published in 1985.
Russia
was the first large country to adopt a flat tax system, with at 13%
rate legislated in 2000 and implemented in January 2001. Here is how it
turned out. I'll list Alvin's notes in chronological order. I put the
most interesting bits in boldface
so they are easy to find.
http://flattaxes.blogspot.com/
This is a wonderful example of the Magic
Formula, which is Low Taxes and Stable Money. Can you see why I
suggest a 19% VAT-only system for Greece (a 15% flat tax would be fine
too, but why be a copycat) -- right here, right now, combined with a
default and restructuring of past debts?
December
10,
2006:
The
Magic Formula
May
9,
2010:
The
Two
Santa
Claus
Theory
May
2,
2010:
Thoughts
on
Greece
February
14,
2010:
The
Problem
with
Greece
Remember, Russia defaulted on its dollar-denominated debt in 1998. In
2000, the debt was restructured with a 50% haircut. Today, Russia's
debt/GDP ratio is about 6%.
Don't make me get my purple dinosaur.
January
18,
2009: "Austerity" and "Stimulus" 2.0
Lastly, at the end, I attached an update on what happened in the first
year after Albania (adjacent to Greece) adopted a 10% flat tax. Pretty
much the same result. I
always hear about how Russia's success was due to "rising oil prices,"
which mysteriously had little effect on Iran or Nigeria. These figures
are for personal income taxes, not total taxes. Also, revenues had huge
gains in 2001 and 2002, while oil prices were basically flat.
Stable Money was another part
of Russia's success since 2000. The ruble has been basically flat
against the dollar during that period, going from 29/dollar at the
beginning of 2001 to 30/dollar today.
This followed a period of rather harsh inflation. The 1989-1995 period
had hyperinflation during which the ruble's value fell by a factor of
about 1000:1. The ruble was stabilized against the dollar somewhat from
1995-1998, but collapsed again during the crisis of 1998, in which
Russia defaulted on its dollar-denominated debt. The ruble's value fell
by an additional factor of about 5:1 before being stabilized in 2000. I
might note that the flat tax plan, which was passed in mid-2000,
probably did a lot to help stabilize the ruble as well. Big tax cuts
tend to be currency-supportive.
September
30,
2007:
Taxes
and Money
Thus, the immense gains in nominal revenue (and workers' salaries)
during the 2001-2007 period represents in part a correction from past
inflations. Basically, Russians had become very, very poor due to a
decade of economic disaster. Wages were extremely low, in U.S. dollar
terms, as were prices for just about everything. The "inflation" during
the 2001-2007 period was not a matter of the currency losing value
(except to the extent that the dollar and all other currencies lost
value vs. gold during that period), but mostly a matter of Russian
prices rebounding from super-depressed levels, on top of genuine new
wealth creation during that period. Similar to the "inflation" of the
1980s in the U.S.
The revenue from the 13% flat income tax in 2007, of 1,267 billion
rubles, was 624% higher than revenue of 175 billion rubles in 2000.
Remember, during this time the ruble was about stable vs. the dollar,
so the gains were not "inflationary" in that sense.
Albania is not starting from such a devaluation-depressed level, so the
results are not quite so dramatic. But they are still very good, as you
will see.
I was talking to a Russian friend of mine in 2005. He had an advanced
degree in nuclear physics -- and Russian nuclear physicists are among
the best in the world -- but worked on Wall Street. "Russia is not an
emerging market," I told him, "it is an industrial economy that
suffered a
disaster, like Germany after World War II."
If Russia sticks with the Magic Formula,
it
will
become
wealthier than Germany in a couple decades. Of course, a
reliable gold-linked ruble would really kick the Magic Formula into high gear. Moscow
would become the world's financial capital.
Lastly, it appears that we need a graduate student to go and figure out
what has happened in all of these countries (about 25 so far) that have
followed Russia's lead and adopted a flat tax system. That would make a
fine Ph. D. dissertation and a book. Contact Alvin Rabushka at
Stanford. If you are in a philanthropic mood, you might even consider
funding a graduate student. Once again, contact Alvin Rabushka, who is
the go-to guy for all things flat tax.
February
7,
2010:
Ibn
Khaldun,
Taxes,
and
the
Rise
and
Fall
of
Empires
January
17,
2010:
The
Futility
of
Raising Taxes
June
30,
2007:
East
Europe's
Flat
Tax
Revolution
August
9,
2009: Recommended book: For Good and Evil -- the Impact
of Taxes on the Course of Civilization
August
5,
2008: Tax Cuts are the Solution to Everything
September
14,
2008: Depression Economics
November
24,
2008: Russia's Currency Crisis
November 23, 2008: Redeemability and Reserves
November 16, 2008: How To Stabilize the Ruble
May
24,
2008: Japan: Silly Self-Destructive Behavior
May 18, 2008: Japan: Tax Hikes are No Fun
June
24,
2007: The Gold Standard in a Nutshell
* * *
Russia Adopts 13% Flat Tax
July 26, 2000
By Michael S. Bernstam and Alvin Rabushka
International organizations and experts have blamed Russia’s economic
woes on its failure to collect taxes. They have urged the Russian
government to make tax reform a high priority.
The Russian government, under its new president, Vladimir Putin, has
made tax reform its number one economic policy priority. It sought
approval for several tax reform measures from the Duma (lower house of
the Russian parliament) and Federation Council (upper house) before
their mid-summer recess. On July 26, 2000, the Federation Council voted
115-23, with five abstentions, to approve the government’s several tax
reform proposals. On July 19, 2000, the Duma had already approved, by a
234-111 vote, these reforms. The object of the tax reform was to
simplify the tax code and reduce the tax burden on the Russian people.
Among the tax reform measures is a 13% flat tax on personal income,
which replaces the previous three-bracket system with a top rate of
30%. The new flat tax is intended to achieve greater compliance due to
its simplicity and low rate. The New York Times, in its editorial of
May 28, 2000, praised President Putin’s 13% flat-tax plan: It would
reduce corruption, remove subsidies from favored constituents, raise
the money to pay for badly-needed services, and establish the
credibility to push for further reforms. A viable tax system, said the
Times, would allow the Russian government to deal with a failing health
system and poverty.
Other tax reforms include reducing the turnover tax rate, a unified
social tax and lower social insurance tax rate (replacing previously
separate taxes for pensions, social insurance, medical insurance, and
unemployment), elimination of most small nuisance taxes and tax
privileges, and a reduction in customs duties.
Russia is not the first so-called transition economy to enact a flat
tax. Estonia implemented a flat tax on January 1, 1994; in 1999, it
further eliminated the corporate profits tax on retained earnings,
thereby achieving a single flat tax on business cash flow. On January
1, 1995, Latvia implemented a flat tax similar to that of Estonia.
Russia’s adoption of a flat tax brings to three the number of former
Soviet economies that have embraced this concept.
Despite the defeat of Steve Forbes in the Republican Party primaries,
the concept has gained new currency in North America. The Canadian
Alliance, Canada’s official opposition formed from the merger of two
Western parties and the remnants of the Ontario-based Progressive
Conservative Party, has made a 17% flat tax the centerpiece of its
campaign to unseat the Liberal Party in the national election likely to
take place next summer. Mr. Stockwell Day, head of this party and
former treasurer of Alberta, has already achieved a 10.5% provincial
flat tax in Alberta, the first flat tax in any of Canada’s provinces.
The new Russian tax law is scheduled to take effect on January 1, 2001.
* * *
The Flat Tax at Work in Russia
February 21, 2002
By Alvin Rabushka
On March 25, 1981, I first proposed the idea of a flat tax on the
editorial page of The Wall Street Journal in an article entitled “The
Attractions of a Flat-Rate Tax System.” Later that year, on December
10, 1981, Robert E. Hall and I set forth the mechanics of a specific
flat tax proposal in an article entitled “A Proposal to Simplify Our
Tax System.” Twenty years later, the flat tax has become a reality in,
of all places, the Russian Federation.
Since the emergence of the Russian Federation a decade ago, taxpayer
compliance has been a problem. To help resolve this problem and improve
incentives, the Russian government enacted in July 2000 a 13% flat-rate
tax on personal income. It took effect on January 1, 2001, replacing
the previous three-bracket system, which imposed a top rate of 30% on
taxable income exceeding $5,000. President George W. Bush praised
Russia’s flat tax in each of his meetings with President Vladimir
Putin, most recently during their November 15, 2001, press conference
held at Crawford High School.
A year has passed since its implementation, which provides an
opportunity to evaluate its success.
From a revenue standpoint, the 13%
flat tax has exceeded all expectations. Preliminary data for 2001
reveal that the flat tax generated R254.7 billion, an increase of R80.2
billion over 2000, up 46%.
($1 = R30.8) Adjusting for ruble inflation of about 18% during
2001, real ruble revenues increased about 28%. Personal income tax,
which contributed 12.1% to consolidated budget revenues in 2000,
amounted to 12.7% in 2001. Since economic growth in 2001 of 5.2% was
lower than the record 8.3% growth in 2000, the substantial rise in
personal income tax revenue cannot be attributed solely, or even
largely, to last year’s growth, but rather to the tax reform itself.
It is estimated that 60 million Russian employees receive salaries or
wages subject to personal income tax. In tax year 2000 (the deadline
for filing was May 3, 2001), only 2.8 million individuals filed tax
returns. This small number is due to the fact that, for most employees,
income tax is calculated and withheld monthly by employers and remitted
directly to the Russian Treasury. Individuals need not file a return
unless they owe additional taxes from other sources of income or seek a
refund because of special deductions or credits.
Sole proprietors can choose to pay imputed income tax instead of filing
a tax return. In tax year 2000, some 1.336 million individuals chose
this option, which also reduces the number of returns.
Before examining the tax form itself, it should be noted that the new
tax includes two higher brackets. Dividends are taxed at 30%. However,
double taxation on corporate income has been abolished. Since the
corporate tax rate fell from 35% in 2001 to 24% on January 1, 2002, it
is likely that the tax on dividends will be lowered in the future. In
addition to dividends, foreigners and Russians who reside in Russia
less than 183 days during the tax year are taxed at a rate of 30% on
their taxable income. Other sources of income (e.g, lotteries) are
taxed at 35%. The higher rates on dividends and other sources of income
reflect a Russian distinction between so-called “unearned income” and
“earned income” (even though capital gains on homes and securities are
exempt).
Russia’s basic flat tax form, Form 3, resembles U.S. Form 1040A, with
one addition. Form 3 is used to report income from wages and salaries
(Form 1040A), along with professional income (Schedule C). For most
taxpayers, required information can be reported on Form 3. Individuals
with self-employment and other sources of income, and/or who are able
to itemize specific deductions, may need to attach several
supplementary schedules. Altogether, taxpayers can attach up to 10
supplementary schedules (A, B, V, G, D, E, Zh, Z, I, and K—the Russian
alphabetical order transliterated according to the Library of Congress
convention). For a small number of taxpayers, the Russian individual
tax return is more complicated to file, closer to Form 1040. Some
Russians will likely avail themselves of the Russian version of H &
R Block. The tax form recognizes this complexity by including space for
the signature of a professional tax preparer.
Form 3 is only two pages long. The first page includes the taxpayer’s
name, taxpayer identification number, details of a photo ID, period of
residence and citizenship (for foreign nationals), permanent address,
and number of supplementary documents. Page 2 of form three on which
financial data are reported consists of 5 sections. Sections I through
IV contain 13 lines on which salaried employees and small business
owners, or sole proprietors, report their income from all sources,
expenses, allowable deductions, tax credits, and other pertinent items.
Section V contains 4 lines that apply to self-employed professional
persons for reporting estimated income on a quarterly basis (Form
1040-ES).
Here is the information that the taxpayer must report line by line.
Section I. Tax base (income) which is taxable at a 13% rate.
1. Wages, salaries, and small business income (gross income)
2. Total deductions (transferred and added from lines V3.2, G1.5, G2.6,
D1.1, D2.1, E.4, Z3.6, and Z3.7 as described below)
V3.2: Total expenses related to individual entrepreneurship and private
practice (small business expenses as reported on Schedule C)
G1.5: A deduction of up to R2000 for each the following types of
partially taxable income (cash allowances from employer to retired
employees due to age or disability, gifts that are exempt from the gift
and inheritance tax, prizes in cash or kind won in contests sponsored
by the government or a legislative body, and employer reimbursement of
prescribed pharmaceuticals—total limit of R8000 from all four
categories)
G2.6: Deductions from the sale of real property and financial assets.
Deduction for housing and land owned less than five years is limited to
documented costs up to R1 million; deduction for housing and land owned
more than five years is unlimited. For non-financial real property
owned less than three years, deduction is limited to R125,000; for
non-financial real property owned more than three years, deduction is
unlimited. For gains on the sale of financial assets, deduction is
unlimited (capital gains reported on Schedule G)
D1.1: Expenses incurred in the production of income received from
honoraria, publications, patents, and copyrights (reported on Schedule
E)
D2.1: Expenses incurred in the production of income from contractual
services under civil-law contracts (reported on Schedule C relating to
Form 1099 Misc.)
E.4: Calculation of standard deduction (equivalent to personal
exemptions). For example, R3000 per month for victims of nuclear
disasters and disabled servicemen; R500 per month for other victims of
war and radiation sickness; R400 per month for all other taxpayers
until annual income exceeds R20,000; and R300 per month for each child
under 18 years of age until the child’s parent or guardian’s income
exceeds R20,000 in any tax year. Calculation of social deductions
(equivalent to itemized deductions): for charitable contributions
(limited to 25% of total revenue); self-financed education (limited to
R25,000); children’s education (limited to R25,000 per child); medical
and drug expenses (limited to R25,000);and catastrophic medical
expenses (unlimited). Social deductions are granted only after the
return is filed.
Z3.6: Expenses supported by documents for purchase and/or new
construction of residential housing in 2001 (limited to R600,000) This
excludes summer homes, or dachas.
Z3.7: Mortgage interest deduction on residential housing in 2001
(unlimited) Excludes summer homes, or dachas.
3. Calculation of tax due to be remitted from consolidated annual
income (total taxable income), line 1 minus line 2.
4. Tax due: line 3 times 13%
II. Tax base which is taxable at a 30% rate
5. Total dividends (Schedule B); income of non-residents in Russia
(less than 183 days)
6. Offsets (tax withheld by payer of dividends and remitted on behalf
of recipient)
7. (Line 5 times 30%) minus line 6.
III. Tax base, which is taxable at a 35% rate.
8. Other income. Sources include: (1) gains and prizes from contests
and games for the purpose of advertising, (2) winning of lotteries and
pari-mutual bets, (3) net insurance receipts (4) bank taxable interest;
and, (5) gains from loans at below-market rates.
Bank interest is taxable (1) when interest on ruble deposits exceeds
75% of the Central Bank’s refinancing rate, or (2) on foreign currency
deposits if annual interest exceeds 9%. Material gains from borrowing
are taxable if interest charged is below 75% of the Central Bank’s
refinancing rate or below 9% if in foreign currency.
These adjustments amount to a proxy for inflation. The current Central
Bank refinancing rate is 25%. Three-quarters of that is 18.75%. Most
deposits earn less than 18.75%, which means that interest income is not
generally subject to taxation.
9. Tax due (line 8 times 35%).
IV. Calculation of total amount of tax due from all sources of income
10. Sum of lines 4, 7, and 9 (total tax due)
11. Withheld taxes and estimated tax payments (total taxes paid)
12. Refund due
13. Additional tax due
V. Calculation of estimated income and estimated tax for private
entrepreneurs, public notaries, and those in private practice.
14. Total estimated income (determined by taxpayer)
15. Total withholding, according to Articles 2.18 and 2.21 of the tax
code
16. Total estimated taxable income
17. Total advance income tax payments
Lines 15, 16, and 17 are filled in by the tax authorities.
Russia’s personal income tax excludes income from a large number of
sources. Examples include public welfare for the disabled and children,
state pensions, alimony, grants received for development of science,
education and art, compensation for natural disasters,
enterprise-provided medical services, stipends to students, proceeds of
part-time farming (food grown at dachas), income from amateur hunting,
athletic prizes, interest on government debt, capital gains on
government bonds, military pay, recipients of payments from labor-union
sponsored athletic and cultural events, and others.
To summarize, the 13% flat tax has exceeded the expectations of the
government in terms of revenue. For the vast majority of taxpayers, its
implementation is simple and no forms need be filed. For small
businesses, the 13% flat tax provides strong incentives and compliance
is straightforward. Small wonder that President Bush had a gleam in his
eye when he praised Russia’s flat tax. Perhaps he might take a lesson
from President Putin as he considers his campaign themes for 2004.
(Anjela and Diana Kniazeva, graduate students at Stanford University,
provided research assistance for the preparation of this article.)
* * *
Improving Russia’s 13% Flat Tax
March 11, 2002
By Alvin Rabushka
On February 21, 2002, I posted to this site an article entitled “The
Flat Tax at Work in Russia.” In that article, I pointed out an anomaly
in Russia’s 13% flat tax, namely, there are two sources of income that
are taxed at higher rates. The first source is dividends and the income
of non-residents, which are taxed at 30%. The second consists of five
different kinds of income, which are taxed at 35%. These are (1) gains
and prizes from contests and games for the purpose of advertising, (2)
winnings of lotteries and pari-mutual bets, (3) net insurance receipts,
(4) bank taxable interest, and (5) gains from loans at below-market
rates. As mentioned in “The Flat Tax at Work in Russia,” for all
practical purposes, the latter three kinds of income are either lightly
taxed or not taxed at all.
There is, in my view, no apparent reason for these two higher rates,
especially the 35% rate, which serve only to complicate the simplicity
and administration of Russia’s otherwise transparent 13% flat tax.
In apparent agreement with this view, the Russian government is
currently preparing a Bill on Lotteries that would reduce the 35% tax
rate on lotteries to the standard flat rate of 13%. (See
http://www.rbcnews.com/free/20020307152617.shtml) The organizer of a
lottery would have to pay 10% of the profit derived from the lottery
after deducting all expenses and awarding prizes. The bill will define
lotteries aimed at the promotion of specific goods on the market as a
kind of lottery and taxed at 13%.
It will be worth watching the Russian government in the coming months
to see if it continues to simplify its flat tax on personal income by
dropping the remaining kinds of income taxed at the third rate. The
reduction in the corporate tax rate from 35% to 24%, which took effect
on January 1, 2002, should also prompt the government to reduce that
30% tax rate on dividends in the near future.
* * *
Further Extending Russia’s Tax Reforms
April 1, 2002
By Alvin Rabushka
The Russian government is in the process of further extending its tax
reforms. A first step was the introduction of a 13% flat tax on
personal income (see “The Flat Tax at Work in Russia” and “Improving
Russia’s 13% Flat Tax”), which took effect in 2001. Second, it reduced
the corporate tax rate from 35% to 24%, beginning January 1, 2002.
Now the Russian government is planning to simplify and reduce the tax
burden on small businesses. Under the current proposal put forth by the
Russian government, a small business is defined as having no more than
20 staff and annual turnover under R10 million (about $322,000 at the
current exchange rate). The proposal would grant small businesses a
choice between a 20% flat tax on profits or an 8% flat tax on revenues,
whichever is lower, beginning January 1, 2003 (assuming Duma approval,
which appears likely). This small business tax rate on profits
partially splits the difference between the higher 24% corporate rate
and the 13% personal rate.
Other changes in the tax treatment of small businesses will accompany
the reduction in rates. Collection of the small business tax will shift
from a monthly to quarterly basis, mirroring the reporting of estimated
taxes for private entrepreneurs and professionals in the personal
income tax. Accounting for tax purposes will change from an accrual to
cash basis; taxes will no longer be collected on imputed or phantom
income. Finally, small businesses will be able to expense their outlays
on capital assets in place of the current depreciation system (along
the lines of the Section 179 expensing provision in the U.S. Internal
Revenue Code). These changes are expected to reduce accounting costs
for small business enterprises.
The plan also exempts small businesses from value-added tax, sales tax,
property tax, and social insurance taxes.
Assuming some version of this small business tax reform proposal is
enacted by the Duma this year, Russia will have completed a major
overhaul of its personal, corporate, and small business taxation within
the short span of three years. Some opportunity for further simplifying
the personal income tax remains (see “Improving Russia’s 13% Flat
Tax”), especially reducing the 30% tax rate on dividends now that the
corporate profits tax rate has been cut to 24% and there is no capital
gains tax on the sale of Russian equities.
* * *
Tax Reform Remains High on Russia’s
Policy Agenda
May 22, 2002
By Alvin Rabushka
On April, 2002, I posted to this site an article entitled “Further
Extending Russia’s Tax Reforms.” It described the Russian government’s
new proposal to radically simplify and reduce the tax treatment of
small businesses. Under the plan, small business firms could choose to
remit the lesser of a 20% flat tax on profits or an 8% flat tax on
revenues. Firms that qualify—those with no more than 20 staff and
turnover under R10 million ($320,000)—would also be exempt from
value-added tax, sales tax, property tax, and social insurance taxes.
Thus far, Russia’s 13% flat tax on personal income (see “The Flat Tax
at Work in Russia”), which took effect in 2001, has met its two major
objectives of improving incentives and compliance. Building on it, the
Russian government reduced corporate income tax rates from 35% to 24%
in 2002. On May 21, 2002, the government further enhanced its small
business proposal.
It widened the definition of a small business to include firms with
turnover up to R15 million ($469,000), a 50% increase over the initial
proposal of a few months ago. Small business firms could choose to
remit the lesser of a 15% flat tax on profits or a 6% flat tax on
turnover.
Note that the 15% flat tax on small business profits is close to the
13% flat tax on personal income, which encompasses sole proprietors. By
reducing the 20% rate to 15%, the Russian government will make it
easier in the future to equalize the tax treatment of small business
income, eliminating the distinction between sole proprietor and small
firms of 2-20 employees.
* * *
Completing Small Business Tax Reform
July 3, 2002
By Alvin Rabushka
On July 2, 2002, the Duma, the lower house of the Russian Parliament,
concluded its business prior to the start of its summer vacation. Among
the bills approved was a comprehensive reform of small business
taxation. Once the measure is approved by the Federation Council, the
upper house of Parliament, and signed by President Putin, the measure
becomes law.
On May 22, 2002, I posted to this site an article entitled “Tax Reform
Remains High on Russia’s Policy Agenda.” It described the government’s
proposal. Small firms with fewer than 20 staff and turnover under R15
million ($477,100 at current exchange rates) could choose to remit the
lesser of a 15% flat tax on profits or a 6% flat tax on turnover.
Eligible businesses would enjoy exemption from value-added tax, sales
tax, property tax, and social insurance taxes.
The measure approved by the Duma on July 2 retained the previous
provisions on tax rates and turnover, but extended the number of
employees in any eligible small business to 100. The benefits of
qualifying as a small business are readily apparent since larger
corporations are subject to a 24% profits tax.
We have commented on this site on all of Russia’s major tax reforms,
especially the 13% flat tax on personal income (see “The Flat Tax at
Work in Russia” and The Flat Tax). The personal income tax has been
especially productive of revenue, with ruble receipts up 28% in real
terms in 2001 compared with 2000.
On July 1, 2001, the senior deputy minister of finance reported that
underpaid taxes to the federal budget in the first half of 2002
amounted to R 17 billion ($540.17 million). He acknowledged that
collection of tax on the extraction of natural resources, income tax
for individuals, and the unified social tax was satisfactory, but that
the collection of value-added taxes and profits taxes was below
projections. (See www.rbcnews.com/free/20020701140045.shtm) The reasons
for the new small business tax are to improve incentives and compliance
among these firms. With exemptions from value-added tax, sales tax,
property tax, and social insurance taxes, small businesses will receive
a substantial reduction in their tax burdens. Banking, insurance, and
investment businesses are excluded from the small business tax reform.
Where can Russian tax reform go from here?
Additional simplification can be achieved by reducing the small
business profits flat tax rate to 13%, which would eliminate the
unnecessary distinction between sole proprietors and small businesses.
A more drastic measure would reduce the corporate income tax rate from
24% to 13%, thereby permitting full integration with the personal and
small business taxes. This would enable all taxpaying entities to be
treated equally in terms of the choice of legal ownership.
If it were necessary to maintain revenue neutrality, the government
could raise the value-added tax by a few percentage points, or impose a
higher natural resource extraction tax.
Recent rate reductions and simplifications have transformed a complex,
high-rate tax system into a simpler, low-rate system. A few additional
measures could complete the process of tax reform.
* * *
The Flat Tax at Work in Russia: Year
Two
February 18, 2003
By Alvin Rabushka
On January 1, 2001, a 13% flat-rate tax on personal income took effect
in Russia. (On the general principles and beneficial economic effects
of the flat tax, see The Flat Tax.) Russia’s 13% flat tax replaced a
three-bracket system, which imposed a top rate of 30% on taxable income
exceeding $5,000.
During its first year, the 13% flat tax exceeded all expectations. In
2001, personal income taxes increased 46% in nominal rubles, or 28% in
real rubles after adjusting for ruble inflation of 18%. Personal income
tax as a share of consolidated budget tax revenue rose from 12.1% in
2000 to 12.7% in 2001. Since economic growth of 5.0% in 2001 was lower
than the record 9.0% growth in 2000, the rise in revenue cannot be
attributed solely, or even largely, to growth in 2001. For a detailed
treatment of Russia’s 13% flat tax, see “The Flat Tax at Work in
Russia.”
Data for 2002 are now available, posted to the Russian government’s
Ministry of Finance web site. (Http://www.nalog.ru) Personal income taxes in 2002 amounted to
R357.1 billion ($1=R31.7), up from R255.5 billion in 2001, an increase
of
39.8%. Annualized average ruble
inflation in 2002 was 15.8%. Thus, real ruble tax revenues rose 20.7%,
another large increase. Moreover, economic growth of 4.3% in 2002 was
lower than the 5.0% growth the previous year. Real ruble revenues
continued to rise in 2002 despite slowing growth, suggesting greater
compliance and efficiency in tax administration.
Since the implementation of Russia’s flat tax, personal income taxes
have contributed a growing share of Russia’s consolidated budget. In
2002, the flat tax generated 15.3% of total tax revenue, up from 12.7%
in 2001. From relative unimportance as a source of revenue a few short
years ago, the 13% flat tax on personal income now exceeds excise taxes
and taxes on natural resource use, and is fast catching up with
corporate income tax and value added tax.
To date, the governments of Estonia, Latvia, and Russia have enacted
flat-rate taxes on personal income. Russia has also implemented a
reduction in the corporate rate of tax, from 35% to 24%, effective
January 1, 2002. Russia has also enacted a flat-rate small business
tax, the lesser of 6% of gross turnover or 15% of profits. (See
“Further Extending Russia’s Tax Reforms,” “Tax Reform Remains High on
Russia’s Policy Agenda,” and “Completing Small Business Tax Reform”) A
Chinese edition of The Flat Tax is scheduled for publication by China’s
Ministry of Finance in early 2003.
(Anjela and Diana Kniazeva, graduate students in the Department of
Economics, Stern School of Business, New York University, provided
research assistance for the preparation of this article.)
* * *
The Flat Tax at Work in Russia: Year
Three
April 26, 2004
By Alvin Rabushka
On January 1, 2001, a 13% flat-rate tax on personal income took effect
in Russia. (The general principles and beneficial economic effects of
the flat tax appear in The Flat Tax.) Russia’s 13% flat tax replaced a
three-bracket system, which imposed a top rate of 30% on taxable income
exceeding $5,000. The flat tax has been remarkably successful by every
conceivable measure, and has encouraged such other countries as Serbia
(2003), Ukraine (2004), and Slovakia (2004) to implement flat taxes of
their own. Political parties in Poland, the Czech Republic, and Georgia
have announced their support for the flat tax and there is interest in
Bulgaria and Romania. Even China has taken the step of translating The
Flat Tax into Chinese for consideration by the Ministry of Finance.
Let’s review Russia’s 13% flat tax since its implementation on January
1, 2001. In 2001, personal income tax (PIT) revenue totaled R255.5
billion, an increase of 46.7% in nominal rubles, or 25.2% in real
rubles after adjusting for inflation of 21.5%. PIT revenue as a share
of consolidated budget tax revenue rose from 12.1% in 2000 to 12.7% in
2001. Since economic growth of 5.1% in 2001 was lower than the
post-Soviet record 10.0% growth in 2000, the rise in revenue cannot be
attributed solely, or even largely, to growth in 2001. (For a detailed
treatment of Russia’s 13% flat tax, see “The Flat Tax at Work in
Russia.”)
In 2002, PIT revenue amounted to R357.1 billion, an increase of 39.7%
over 2001. After adjusting for inflation of 15.1%, real revenue rose
24.6%, supplying 15.3% of the consolidated budget. GDP growth in 2002
was 4.7%, a small decline over 2001. (See “The Flat Tax at Work in
Russia: Year Two.)
In 2003, PIT revenue generated R449.8 billion, a nominal gain of 27.2%
over 2002. After adjusting for inflation of 12.0%, real revenue
increased 15.2%, supplying 17% of consolidated budget revenue. GDP
growth in 2003 was a more robust 7.3%. Only corporate income tax and
value added tax generated more revenue than the PIT.
The composition of PIT revenue in 2003 was as follows: taxes assessed
on income at the 13% rate generated 96.9% of all PIT revenue; taxes on
dividends, assessed at a higher 30% rate, 1.9%; and taxes on
non-residents and individual entrepreneurs, 0.9%.
In the three years since the top rate of PIT was reduced from 30% to
13%, real flat tax revenue has risen by 79.7%. Russia’s budget is
relatively healthy. Tax compliance has improved. And incentives to
work, save, and invest remain strong.
(Anjela and Diana Kniazeva, graduate students in the Department of
Economics, Stern School of Business, New York University, provided
research assistance for the preparation of this article.)
* * *
The Flat Tax at Work in Russia: Year
Four, 2004
January 26, 2005
By Alvin Rabushka
On January 25, 2005, the Ministry of Taxation of the Russian Federation
reported total taxes and revenues for the consolidated federal and
regional budgets for 2004. The data show that the 13% flat tax on
personal income continues to achieve very positive results.
In 2004, the ministry collected 574.1 billion rubles ($1 = R28) in
personal income tax receipts, an increase of 26.1%
over 2003. After adjusting for annualized consumer price inflation of
11.7% in 2004, real personal income tax revenue rose 14.4%. This growth
builds on real ruble revenue increases of 25.2% in 2001, 24.6% in 2002,
and 15.2% in 2003. For the four years, compound real ruble revenue
increased 105.6%.
The 26.1% nominal growth in personal income tax receipts outpaced the
overall 24.7% rise in total taxes and fees in 2004. As a share of total
taxes and revenue, it rivals payments for use of natural resources, is
more than double excises, and now stands at 76.6% of value added tax.
The most dramatic change in 2004 is the 64.5% rise in nominal rubles,
or 52.8% in real rubles, in corporate taxes. This is due to stepped up
enforcement, exemplified in Yukos and other corporate cases, which has
produced a new enthusiasm among corporate heads for compliance.
Consolidated tax receipts are divided between the federal and regional
budgets. Personal income tax revenue is allocated entirely to regional
budgets. It now supplies 31.9% of regional revenue, making regional
governments the main beneficiaries of the 2000 personal income tax
reform.
* * *
The Flat Tax at Work in Russia: Year
Five, 2005
May 11, 2006
By Alvin Rabushka
The Ministry of Finance of the Russian Federation has reported
provisional data for total taxes and revenues for the consolidated
federal and regional budgets for 2005. The data show that the 13% flat
tax on personal income continues to achieve very positive results.
In 2005, the ministry collected 707 billion rubles ($1 = R27) in
personal income tax receipts, an increase of 23.1 percent
over 2004. After adjusting for annualized consumer price inflation of
10.95% in 2004, real personal income tax revenue rose 10.9%. This
builds on real ruble revenue increases of 25.2% in 2001, 24.6% in 2002,
15.2% in 2003, and 14.4% in 2004. Total real ruble revenue has
increased 128 percent (more than doubled) in the five years since the
13% flat tax was implemented. It should be recalled that top marginal
rate in 2000 was 30% before the implementation of the 13% flat tax on
January 1, 2001. The low flat rate contributed to the decline in
capital flight, improved taxpayer compliance, and increased revenue. To
further the culture of compliance, several prominent Russians have been
jailed on charges of tax evasion.
Other tax revenues have shown even healthier increases. In real ruble
terms, after adjusting for inflation, corporate profits taxes rose
38.4%, value added taxes, 24%, taxes, dues and regular payments for the
use of natural resources (severance tax), 44.4%, and taxes on external
trade and foreign economic operations, 78.3%. The high price of oil and
other natural resources accounts for the rapid growth in tax revenues
from corporations, value added taxes, severance, and external trade.
The remaining categories of excises, property taxes, and the single
social tax declined.
The 13% flat tax has become a stable feature of Russia’s tax system.
With the rise in real incomes percolating through the economy, receipts
continue to grow at a healthy clip.
* * *
The Flat Tax at Work in Russia: Year
Six, 2006
December 13, 2007
By Alvin Rabushka
The Federal Treasury of the Russian Federation has compiled the data
for total taxes and revenues for the consolidated federal and regional
budgets for 2006. The data show that the 13% flat tax on personal
income continues to achieve very positive results.
In 2006, the Treasury collected 930.4 billion rubles ($1=RUB24.4) in
personal income tax receipts, a nominal increase of 31.6%
over the 707 billion rubles in 2005. After adjusting for annualized
consumer price inflation of 9.0% in 2006, real personal income tax
revenue rose 22.6% in 2006. Total real ruble revenue has more than
tripled in the six years since the 13% flat tax was implemented on
January 1, 2001. It should be recalled that the top marginal rate in
2000 was 30% before the implementation of the 13% flat tax. The low
flat rate has contributed to the decline in capital flight, improved
taxpayer compliance, and increased revenue.
The 13% flat tax has become a stable feature of Russia’s tax system.
With the rise in real incomes percolating through the economy, receipts
continue to grow at a healthy clip.
* * *
The Flat Tax at Work in Russia: Year
Seven, 2007
August 28, 2008
By Alvin Rabushka
The Federal Treasury of the Russian Federation has compiled the data
for total taxes and revenues for the consolidated federal and regional
budgets for 2006. The data show that the 13% flat tax on personal
income continues to achieve very positive results.
In 2007, the Treasury collected 1,266.6 billion rubles ($1=RUB24.6) in
personal income tax receipts, a nominal increase of 36.1%
over the 930.3 billion rubles in 2006. After adjusting for annualized
consumer price inflation of 11.9% in 2007, real personal income tax
revenue rose 17.8% in 2007. Total real ruble revenue has substantially
more than tripled in the seven years since the 13% flat tax was
implemented on January 1, 2001. It should be recalled that the top
marginal rate in 2000 was 30% before the implementation of the 13% flat
tax. The low flat rate has contributed to the decline in capital
flight, improved taxpayer compliance, and increased revenue.
The 13% flat tax has become a stable feature of Russia’s tax system.
With the rise in real incomes percolating through the economy, receipts
continue to grow at a healthy clip.
* * *
The Flat Tax at Work in Albania: Year
One
Beginning January 1, 2008, Albania implemented a 10% flat tax on
corporate and personal income. The 10% personal rate replaced five
rates that peaked at 30% while the 10% corporate rate was halved from
the previous 20% rate. Despite the reduction in rates, total revenues increased from LEK
125 billion in 2007 to LEK 148 billion in 2008, an increase of 18.4%.
($1.00
=
LEK
96.71).
With inflation a modest 3% in 2008, real
inflated-adjusted revenue rose 15.2%.
One other development in the flat tax world is worth noting. On January
1, 2009, Latvia’s personal income tax rate fell from 25% to 23%.
