Dmitry Medvedev doesn’t rule out introducing progressive personal income tax, but not soon

(Interfax – January 28, 2013)

Russian Prime Minister Dmitry Medvedev does not rule out that the issue of introducing a progressive personal income tax might be raised at some point, but not in the near future.

“At some point, of course, the issue of progress taxation might be put on the agenda, it seems to me that this is not a question for today because we could lose more than we would gain. In other words, our tax system in general remains fairly attractive and we would like to preserve these advantages for the time being,” Medvedev said in an interview with German newspaper Handelsblatt.

He remarked that the flat personal income tax rate was introduced in Russia more than ten years ago (in 2001) in order “to bring salaries out of envelopes and make them ‘white.'”

“We succeeded, everyone pays taxes now, since this tax is not high – 13%, both billionaires and regular people pay,” Medvedev said.

“We understand that objectively superrich people should share their wealth with less well-off people, with the budget. But for us it was more important for them to legalize these incomes. We succeeded in this and at the moment the issue of the day is not to immediately move to progressive taxation,” the prime minister said.

However, he said that “sooner or later this issue will come up, that’s obvious.”

Speaking about taxation of super incomes, he said the idea of a luxury tax is now being discussed. “This will perhaps make it possible to balance some kind of social interests. But in general this problem exists for all countries, even for those countries where there is a progressive system of taxation or super high tax, such as France. Nonetheless, the difference in incomes between the so-called top decile and the bottom decile in terms of wealth has increased by 30 times, I think, in the past 20 years,” Medvedev said.

President Vladimir Putin in December came out in favour of preserving the flat personal income tax. “I’ve already talked about this, you know my opinion – we can’t abandon the so-called flat rate yet. A progressive tax, however socially fair it looks on the outside, will not ensure this fairness,” Putin said in his message to the Federal Assembly. On the contrary, the president believes a progressive tax would become “a burden for millions of people with average incomes.”

In addition, he believes a progressive tax would result in lost budget revenues. “Which means we’ll have shortages in financing the army, pensions, the public sector. There’s your social justice,” Putin said.

The State Duma on January 15 rejected three bills to introduce a progressive personal income tax. One of them was written by A Just Russia party members in 2010 and the other two were submitted by the Communists in 2010 and 2011.

The Duma Budget Committee said in its decisions on the bills that the use of such a tax system from 1992 to 2001 showed that it is ineffective. Employers and workers tried to minimize actually paid incomes. In addition, the legislators noted the difficulty and higher cost of administering such a tax system.

The introduction of a progressive tax could also reduce Russia’s investment appeal, worsen tax conditions for the nascent middle class, and further encourage highly qualified specialists to leave the country, the legislators argued.