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. Last Updated: 07/27/2016

Blueprint Cuts Tax, Social Benefits

A blueprint for the economy, due to be completed within a week, calls for slashing income tax to a flat rate of 12 percent to 13 percent, combining payroll contributions to social funds into one reduced tax, abolishing turnover tax and wiping out all tax benefits, an official at the center preparing the plan said Friday.

The program being prepared by the Center for Strategic Research would also slash numerous social benefits - including housing subsidies and free transport - and is bound to face a rough ride through parliament, said Arkady Dvorkovich, the economist in charge of mapping fiscal and budgetary policy for the think tank.

If the blueprint is followed, the economy will grow 70 percent over the next decade, according to "conservative" estimates made by the center, said Dvorkovich.

The long-awaited program aims to deregulate the economy by reducing state interference in commercial activity and making it more efficient in the sectors where it is most needed. It would cut red tape and level out the playing field for economic competition, Dvorkovich said.

The program places top priority on achieving a deficit-free budget for 2001 based on changes to the tax laws and spending cuts that need to be pushed through parliament by the end of this year, he said in a telephone interview from the center's secluded dacha just outside city limits, where leading economists have gathered for a final push to complete the plan.

The plan is due for presentation to a team of officials from the International Monetary Fund due to arrive in Moscow on Monday, said Martin Gilman, head of the IMF's Moscow office, in remarks reported Friday by Interfax.

The center's program maps out a long-term economic strategy under three subheadings: modernizing the economy, social reform and reform of the power structure itself.

Its prescription for the economy is likely to meet strong resistance from entrenched interests in the bureaucratic, regional and financial elites.

Even Dvorkovich hesitated when asked whether he thought the program would cut any ice.

"It seems to me that if at least the tax reforms are pushed through, then 25 percent of the plan's success is ensured," he said after a long pause.

The cuts would reduce the tax burden by 20 percent of gross domestic product in nominal terms, down from 43 percent, Dvorkovich said. However, in real terms, the tax reduction will be much smaller at around 3 percent of GDP because the taxes targeted for cuts and liquidation are in reality not paid anyway, he added.

Reductions in payments to social funds, such as for pensions and health insurance, would mean the aggregate payroll tax burden would drop from some 40 percent to 35 percent, said Oleg Vyugin, a former first deputy finance minister who is now in charge of macroeconomic policy for the center, speaking in a recent telephone interview.

At least one critic has already howled that these cuts are not enough.

"If they were cut to 20 percent, then a lot of companies would not have any interest in hiding wages any more and all of a sudden there would be a flood of funds in from the gray economy," said former Finance Minister Boris Fyodorov at a news conference Thursday.

"But a cut to 35 percent changes nothing, and means the government is going to miss a unique opportunity," he said.

The new government faces a tough task pushing Part II of the Tax Code through parliament according to schedule in the second quarter of this year. The State Duma has so far been bogged down in battling over more than 1,000 amendments to Part I of the code, and further amendments to Part II could further confuse matters.

Nevertheless, think tank members say it is imperative for the Tax Code to be passed soon so that new laws will be in place by Jan. 1, 2001. Otherwise, they cannot come into effect until Jan. 1, 2002.

Shortened early v ersions of the program presented by the center - founded last December under the leadership of First Deputy Property Minister German Gref - have been leaked to local newspapers this week.

Those versions map out plans to improve corporate transparency by introducing international accounting standards, tightening laws on operations through offshore zones and transferring all budget fund transactions to the federal treasury by the first quarter of 2001.

Segodnya provided a point-by-point version of the plan complete with deadlines for legislation and warnings about resistance each measure could encounter. The changes were likely to meet stiff resistance from regional governors, who would face a squeeze on local budgets, and from powerful businessmen who thrive off existing tax benefits, the paper reported.

Dvorkovich said Friday that the plans published in the media have already been altered, but that the main points remain unchanged.

"Only details and nitty-gritty points are under consideration now," he said.

The plan also proposes to significantly reduce state spending - a measure repeatedly called for by presidential economics adviser Andrei Illarionov as one of the best ways to boost economic growth.

Dvorkovich would not say by how much state expenditure was going to be cut.

A version of the plan published in Friday's Kommersant called for state spending to be kept to a maximum of 30 percent of GDP - a level that would still be above the optimal level of 20 percent, according to Illarionov.

Dvorkovich said a major priority for this year would be to cut from the budget all those expenditures that the government regularly fails to meet. That means pushing unpalatable bills through the Duma to abolish some benefits for veterans, children and others - including free transport.

Those spending items would be replaced by funds specifically addressed to take care of those most in need. By cutting out "virtual" expenditures, the government would finally have an honest budget, Dvorkovich said.