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. Last Updated: 07/27/2016

Cabinet, Duma Study Deep Tax Cuts

Leading government and political figures are debating a push to lower income-tax rates and reduce the number of tax brackets, and advocates of those policies call them a crucial step toward reviving the national economy.

Lower taxes are still far from a sure thing. Deputy Prime Minister Mikhail Kasyanov, the No. 2 man in the Cabinet, in an interview published just last week said he doubted taxes would be significantly lowered or reformed in the near future.

Kasyanov is often mentioned as a future prime minister for Vladimir Putin, and Putin also last month said he saw little pressing need for tax reform; obviously, the joint coolness of the likely future president and his prime minister toward cutting taxes could well be decisive.

But the Putin/Kasyanov economic program is still a work in progress. And meanwhile, other Cabinet officials and political figures profess agreement - rhetorically, anyway - that some form of "tax reform" is desirable.

Tax Minister Alexander Pochinok is among those who have publicly joined the calls for lower rates. Pochinok's office is considering a plan to reduce the maximum income-tax rate from 30 percent to 20 percent, tax officials told the Vedomosti newspaper last week.

Under that plan, the existing four tax brackets would also be reduced to two: a 12 percent bracket for those declaring annual incomes under 100,000 rubles ($3,480), and a 20 percent bracket for annual incomes above that level.

The top bracket now, taxed at a 35 percent rate, applies to annual incomes higher than 300,000 rubles. Incomes of 150,001 to 300,000 rubles have a 30 percent tax rate; between 50,001 rubles and 150,000 rubles a 20 percent tax rate; and up to 50,000 rubles a 12 percent tax.

Pochinok's statements echo comments earlier this month by First Deputy Finance Minister Sergei Shatalov.

Shatalov, one of the authors of the Tax Code and now the Finance Ministry's tax reform chief, told Kommersant newspaper the maximum income-tax rate should be cut to 20 percent. He also said that the cut-off point at which the lowest incomes are not taxed at all should be raised even higher.

Other tax-cut plans have been floated in the State Duma by the Union of Right Forces and the Yabloko party. All have drawn praise from Western and Russian liberal-leaning economists.

Peter Boone, head of research at Brunswick, said any tax cut move could potentially lead to an "enormous increase in revenue over time."

Boone said that the experience of countries with similar economic situations is that there is often an 18-month lag between the introduction of income-tax cuts and recovery back to previous revenue levels.

Beyond that, however, Russia could be looking at an "enormous" increase in revenues, Boone said, due to increased compliance.

Just how enormous?

Boone said that personal income tax currently brings in revenues of about 180 billion rubles, equal to 3 percent of Russia's annual gross domestic product of 6 trillion rubles.

Under the most optimistic scenario, if Russia's income-tax rate were dropped from 30 percent to the proposed average of 18 percent, income-tax revenues could leap to 9 percent of GDP, or a whopping 540 billion rubles, within the next five years, Boone said.

That estimate was based on a similar scenario to the experience in Turkey - which shares Russia's high-inflation/high-corruption economic tendencies - assuming constant GDP and full compliance.

Irina Khakamada, one of the three leaders of self-described liberal party the Union of Right Forces, or SPS, said that her party would definitely support such an initiative.

Although SPS would prefer "a more radical reform" - the introduction of a single income-tax bracket of 15 percent - Khakamada said that Pochinok's 20 percent is politcally more realistic.

Officials at Yabloko's press service said that their party is also ready to support the initiative.

It is unclear whether or not acting President Putin will throw his weight behind the moves.

Putin earlier this month said that he saw no reason for tax cuts at the current time.

However, Volk said that plans for such dramatic cuts have been in the works for quite some time.

The consensus among center and center-right politicians is that the current 30 percent income-tax rate is simply too high, creating a disincentive for income tax payments, he said.

To introduce tax-reduction plans, legislation to that effect must first be hammered out by the Duma's budget and tax committee, where other ideas - including proposals from SPS, Yabloko and others - will also be on the table.

The committee is chaired by Alexander Zhukov of the Russian Regions faction, whom Boone described as a "big promoter of tax reforms."

After committee work has been completed, the bill would be introduced into the Duma, the lower house of parliament, where it would have to be passed in three consecutive readings, and then passed to the president for approval.

A crucial question would be whether either the Kremlin's pet political movement Unity or the Communist Party are willing to support the initiative. That remains to be seen, but it is unlikely Unity will act without Putin's tacit blessing.

The entire process is likely to continue into the summer, by which time Putin is expected to have been voted in as president, and would have to decide whether to sign it into law.

Pochinok has also announced plans to introduce a payroll tax cap - a measure that should help the Tax Ministry maximize the revenue-enhancing potential of the income-tax cut.

Peter Reinhardt, senior manager for global employment solutions at Ernst and Young, described the payroll tax cap as "badly needed."

"The absence of a cap serves as a disincentive for employers to disclose the full amount that their employees are earning," he added.

Russia's punitively high level of payroll tax means that lowering income taxes would have little effect on the compliance rates unless payroll tax is also adjusted.

Many employers deliberately under-report their employees' income - allowing the employees to save money on income tax and the corporations to save funds on payroll tax. Companies are unlikely to welcome a situation where increased compliance from employees would lead to massively increased payroll tax being levied on them.

Reinhardt said the cap would be a positive step, as it would help to "bring Russia more in line with international standard practice."

In most Western countries, total tax revenue accounts for 30 percent to 40 percent of GDP, of which income tax comprises approximately 50 percent, meaning that those countries collect income-tax revenues worth about 15 percent to 20 percent of their GDP.