Abstract
The social problem of poverty can be mitigated by introduction of a personal tax-free allowance. In this paper the likely effects that a personal tax-free allowance will have on the Russian budget is investigated. It has been assumed that a tax-free allowance will hit regional budgets because they depend greatly on income tax revenue. The indicated effects were estimated by applying a personal tax-free allowance to the data on economic conditions in 2019. Rosstat data on population, poverty, wages and gross regional product and Federal Tax Service data on the number of taxpayers and personal income tax revenues were used. For the purpose of the paper, two scenarios were calculated. In the first scenario, a zero personal income tax rate is applied to wages below the minimum cost of living. We found that under this scenario the consolidated budget of Russia loses over 1 trillion rubles while regional tax revenues reduce by more than 10%. In the second scenario, citizens whose income is below the minimum cost of living are exempt from personal income tax. We found that under this scenario regional tax revenues would be reduced by 1-5%. In both cases the introduction of the personal tax-free allowance puts greater pressure on regions that critically depend on the personal income tax receipts. It was concluded that the negative effect of an introduction of a personal tax-free allowance would be greater, the greater the prevalence of low-income taxpayers in a region. Also considerable regional disparities create a risk that such tax reform will deepen regional inequality and be disruptive for the Russian budgetary system.
Highlights
Many developing and transition economies have moved away from complex, progressive tax systems to simpler tax schedules, with fewer tax brackets and lower top statutory marginal tax rates (Sabirianova Peter et al, 2010). Keen et al (2008) show that Central and Eastern European (CEE) countries have been especially active in this respect
They identify two waves of flat taxes adopted in recent years: the first wave, including the Baltic countries (Estonia, Latvia and Lithuania), is characterized by tax rates set at moderately high levels, while the second wave started in Russia, followed by Romania and Hungary, and is marked by tax rates that are instead closer to the lowest of the pre-reform rates
Slovakia introduced a flat tax reform in 2004 and Remeta et al (2015) find a number of weaknesses which became apparent over time, noting in particular lower levels of tax revenues and tax compliance, as a result of a weak tax administration and high social security contribution rates
Summary
Many developing and transition economies have moved away from complex, progressive tax systems to simpler tax schedules, with fewer tax brackets and lower top statutory marginal tax rates (Sabirianova Peter et al, 2010). Keen et al (2008) show that Central and Eastern European (CEE) countries have been especially active in this respect. Our analysis considers actual tax benefits systems, including wherever relevant existing tax expenditures, i.e. tax allowances and tax credits These tax expenditures can significantly influence the redistributive impact of flat tax systems, introducing de facto a certain level of progressivity. While a certain level of progressivity exists through tax expenditures and social benefits in the countries considered here, the degree of progressivity of flat tax countries remains significantly below the one of other EU countries featuring a progressive tax system This is an important consideration in particular when progressive tax reforms are complemented with tax credits, e.g. working tax credits, in order to reduce the disincentive effect on labour supply.
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