Hoover Daily Report

The Flat Tax at Work in Russia: Year Five, 2005

via russianeconomy.org
Thursday, May 11, 2006

The Ministry of Finance of the Russian Federation has reported provisional data for total taxes and revenues for the consolidated federal and regional budgets for 2005. The data show that the 13% flat tax on personal income continues to achieve very positive results.

In 2005, the ministry collected 707 billion rubles ($1 = R27) in personal income tax receipts, an increase of 23.1 percent over 2004. After adjusting for annualized consumer price inflation of 10.95% in 2004, real personal income tax revenue rose 10.9%. This builds on real ruble revenue increases of 25.2% in 2001, 24.6% in 2002, 15.2% in 2003, and 14.4% in 2004. Total real ruble revenue has increased 128 percent (more than doubled) in the five years since the 13% flat tax was implemented. It should be recalled that top marginal rate in 2000 was 30% before the implementation of the 13% flat tax on January 1, 2001. The low flat rate contributed to the decline in capital flight, improved taxpayer compliance, and increased revenue. To further the culture of compliance, several prominent Russians have been jailed on charges of tax evasion.

Other tax revenues have shown even healthier increases. In real ruble terms, after adjusting for inflation, corporate profits taxes rose 38.4%, value added taxes, 24%, taxes, dues and regular payments for the use of natural resources (severance tax), 44.4%, and taxes on external trade and foreign economic operations, 78.3%. The high price of oil and other natural resources accounts for the rapid growth in tax revenues from corporations, value added taxes, severance, and external trade. The remaining categories of excises, property taxes, and the single social tax declined.

The 13% flat tax has become a stable feature of Russia’s tax system. With the rise in real incomes percolating through the economy, receipts continue to grow at a healthy clip.