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. Last Updated: 07/27/2016

President Backs Liberal Tax Proposals

In a letter to the State Duma, President Vladimir Putin has clarified his stance on the tax system, backing what tax experts see as unexpectedly liberal proposals.

The letter, which was addressed to Duma Speaker Gennady Seleznyov and in which the president stressed, "Tax reform must become a powerful impulse for business development, the attraction of investment and improved living standards for [our] citizens," was accompanied by a series of new tax proposals to be phased in over two stages - the first in 2000-2001 and the second in 2002-2003.

Putin's letter arrived Tuesday and immediately sent into disarray the work of the Duma tax committee, led by Alexander Zhukov, which has been reviewing elements of Part II of the country's Tax Code for the past several months.

The president's single-most radical suggestion envisages an income-tax system designed to encourage wealthy corporations to cough up their fair share of taxes, while at the same time easing the tax burden on less well-off individuals.

If Putin's proposed changes are adopted, the current sliding scale with a maximum income-tax rate of 30 percent would be replaced by a flat-rate tax of 13 percent.

Peter Arnett, chairman of the European Business Club's tax committee, and co-chairman of the American Chamber of Commerce's tax committee and a tax partner at Ernst & Young, said Putin's proposal was "very interesting. This could be an interesting juncture for Russian tax reform."

In its Wednesday edition, Vedomosti newspaper characterized the move as "an attempt by Putin to increase the authority of the new government in the eyes of the State Duma."

The changes, Arnett said Wednesday in a telephone interview, "should lead to greater compliance and could lead to greater revenues."

Arnett stressed, however, that the linkage between the proposed tax changes and greater tax revenues lies in the length of time they remain in place.

"The proposed changes will only lead to greater compliance once they have been in place for a while - at least one year," said Arnett.

Otherwise, he added, people simply won't believe in them.

The Duma must pass the bills before its July recess if they are to be included when the chamber reconvenes this fall to consider the 2001 budget.

Given Putin's considerable political capital as a highly popular newly elected head of state, and the likely pressure being brought to bear on Duma deputies, the changes are likely to be adopted.

Arnett rated their chance of passing at 60 percent. He said other proposed changes were rumored to include the abolition of turnover taxes on housing and roadway users.

Kommersant said in its Wednesday edition that these were part of the Kremlin's tax package.

Tax analysts like Arnett strongly oppose turnover taxes, saying they would prefer a slight hike in profit taxes if that's what it would take for the government to be able to finance the move.

"The immediate repeal of turnover taxes is good news, even at the cost of another 5 percent in the profit tax [if it came to that]," said Arnett.

In Wednesday's article, Kommersant reported that a 5-percent profit-tax increase was in the offing.

Analysts said they were pleasantly surprised by the liberal tone of Putin's letter to the Duma, because little has been known about Putin's attitude on economic issues.