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The 0.5 percent How Russia plans to drop flat income taxes

Source: Meduza
Alexander Kazakov / Kommersant

On June 23, Russian President Vladimir Putin proposed raising income tax rates “for the rich.” According to him, Russia’s residents (including permanent residents and foreigners) who earn more than 5 million rubles per year (around $73,000) will pay a 15 percent income tax, rather than the 13 percent flat rate starting in 2021. Putin specified that the revenue from these increased taxes — which he claimed would total 60 billion rubles per year (more than $874 million) — will be directed towards specialized medical treatment. Meduza has calculated how many taxpayers this new rate will impact, and what the additional revenue means for Russia’s healthcare system. 

How many of these “rich” taxpayers are there?

According to data from the World Bank’s World Inequality Database, 0.5 percent of Russian adults have a taxable income of 5 million rubles per year. With an adult population of about 114 million people, this means Russia has 570,000 people who could potentially pay this increased tax. Incidentally, they control 14.6 percent of all personal wealth in the country.

How much will they have to pay?

According to the World Bank’s database, the average annual income among the aforementioned 0.5 percent of Russia’s richest was a little less than 16.5 million rubles in 2018 (that’s $237,270 today). As such, it’s clear that the country’s top earners make much more than 5 million rubles per year. Ideally, the additional 2 percent in taxes could be applied to a total amount of 6.55 trillion rubles (more than $94 billion) in income (Keeping in mind that the 15 percent tax only applies to income in excess of 5 million rubles, this number is based on taxing an average income of 11.5 million rubles, or approximately $165,000, multiplied by 570,000 taxpayers). In this case, the state’s consolidated budget would receive 131 billion rubles (approximately $1.88 billion) in additional revenue, and not 60 billion, as Putin claimed.

That said, Putin did not specify which basis would be taxed: currently, for example, income from dividends on shares in companies and from bank accounts are taxed according to separate rules, and it’s not clear if they will be subjected to an increased tax as well. Therefore, we can only assess the tax procedure for personal income that falls under the additional 2 percent.

Is 60 billion rubles in investment a lot of funding for specialized medical treatment?

It’s a lot. 60 billion rubles is more than half of what Russia’s Federal Compulsory Health Insurance Fund allocates for providing free, technologically advanced medical care, beyond its basic compulsory health insurance program (this additional funding provides treatment for cancer, cardiovascular diseases, neurosurgery, orthopedics, and other specialized branches of medicine). In 2020, the fund planned to spend 103.9 billion rubles, approximately $1.5 billion, on specialized medical treatment. 

But the question remains of where exactly this money will go: income tax is not paid into the federal budget, but rather divided between regional (85 percent) and municipal budgets (15 percent). And Moscow collected nearly 1.2 trillion rubles (more than $17.2 billion) of the almost 4 trillion rubles (approximately $57.5 billion) in income tax Russian residents paid in 2019. Naturally, this number includes the majority of revenue from taxpayers whose incomes exceed 5 million rubles. In other words, under the current tax system, the increased tax would only benefit high-tech medicine in the capital, and in a few other wealthy regions. 

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Text by Dmitry Kuznets

Translation by Eilish Hart

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