Russian Government Determined To Cut Taxes

Even the fight between Prime Minister Kasyanov and President Putin did not make the government stop

Was there any considerable economic result achieved from the decision of the Russian government to reduce taxes in the country? Economic specialists and businessmen have not been able to come to consent regarding this issue yet. It deems that if there is a result from that, then it is a lot less efficient than the government thought it would be. Furthermore, President Vladimir Putin and Prime Minister Mikhail Kasyanov even had a fight about it at the end of the last year. It was not a big fight, of course, but the point of it was rather serious.

Vladimir Putin stated that the government was not going to cut taxes in the  country anymore. Mikhail Kasyanov said that the government would continue cutting taxes in the future anyway. The prime minister added that there was no other way to give an incentive to the economic development in Russia. In addition to that, various governmental departments took opposite positions regarding this issue. The Finance Ministry backed the president, while the Ministry for Economic Development and Trade supported the prime minister. However, it became known yesterday, during a regular session of the Russian government, that Russia chose to cut taxes.

Mikhail Kasyanov set forth a very original way to compensate the losses from future tax cuts. The prime minister backed up his offer with a rather profound basis, which was capable of changing the country’s entire budget policy. As Mikhail Kasyanov said to the members of his government, the federal budget should be formed without the foreign debt issue. According to the prime minister, this issue should not be taken into consideration, when working on the federal budget: “We can not take money from our economy, and save that money in order to be on the safe side,” stated the head of the Russian government.  In other words, the prime minister suggested the government should refuse from the obligatory budgetary proficit practice and to sacrifice the proficit to the further reduction of taxes. Kasyanov believes that withdrawing the proficit from the budget for making foreign debt payments will allow to reduce value added tax by three percent very soon. By the way, the reduction of the tax burden has made up three percent of the Gross Domestic Product over three recent years. Nevertheless, Mikhail Kasyanov thinks it is necessary to pass a complex of additional stimulant measures in the field. “The tax reform must become an efficient mechanism to show influence on the economy. The effect from this reform can be seen in the nearest future,” stated the prime minister.

It goes without saying that such program statements right on the threshold of the war in the Persian Gulf were not incidental. Specialists came to conclusion: the reduction of world oil prices as a result of the war with Iraq would be disastrous for the Russian economy. There is an opinion that says that the reduction of oil prices will make the execution of the current year budget totally impossible, not to mention an opportunity of another default in the country. Russian former Minister for Oil, the President of the committee for international cooperation with Iraq, Yury Shafranik, stated in Baghdad that Russia might have the default of the year 1998 repeated again, if oil prices were going to remain on the level of less than $15 per barrel during the period of three months. To all appearances, the Russian government is certain that neither the coming war in the Persian Gulf, nor the growing difference between euro and dollar rates are capable of causing great damage to the Russian economy.

It is hot ruled out that the government is that certain in the country's economic future over unusually large gold and forex reserves of the Russian Central Bank. This way or other, the government has reserved this year in order to think it all over again. Sergey Shatalov, the Deputy Finance Minister, stated at a press briefing yesterday that the government was going to continue its tax reduction policy from January 1, 2004. This means that if there is something wrong happening, the government will have time to turn its plans down. According to Shatalov, the tax burden will be eased not more than one percent of the Gross Domestic Product in the coming three years. It is also planned to reform the system of property taxes and to change the value added tax (VAT) administering system. New rules will allow exporters to have VAT returned in a quicker way. Budgetary debts to exporters will also be cleared.

Sergey Shatalov pointed out that natural person income tax deductions would be increased when purchasing a dwelling. Tax benefits for enterprises are going to be increased too. For example, when purchasing new equipment or real estate with the useful life of over five years, 25% of that cost will be categorized as expenditure at once. This will help to cut the tax base, which will bring some 67 billion excessive rubles to organizations. Shatalov added that the date to start the reduction of the joint social tax would be determined in April of the current year. He said that the rate was originally going to be cut by five percent by the year 2005. However, Prime Minister Kasyanov offered not to adjourn that issue and to find opportunities to cut the social tax rate already in 2004. According to preliminary calculations, the budget will have losses of up to 170 billion rubles as a result of the social tax cut. The cancellation of the sales tax will result in 70 billion rubles of losses to the budget.

Akhtyam Akhtyrov

Translated by Dmitry Sudakov

Author`s name Olga Savka