On increasing payroll taxes

An old proverb says ‘a penny saved is a penny gained’. By erasing theft from the budget we shall solve not only the pension problem but many other social issues as well.

When the question of increasing payroll taxes was first raised we understood that it was a necessary measure and, it seems, a global trend. Even economically stable countries cannot fund social spending solely from the budget and are forced to keep taxes at a high level.

At the same time, we have always claimed that the increase in the rates of social contributions should not be as steep as happened in Russia. No less important is its indiscriminate approach: it is obvious that for businesses with a high share of wages in their expenditure such a significant increase in national insurance contributions is particularly pernicious.

We believe that the low collection of national insurance contributions is caused by many factors. We do not know the precise statistics and cannot tell whether the increase in rates has led to the liquidation of many businesses - perhaps some companies actually did cease to exist or else have suspended their activities. However, the most likely reason for the low collection is the cuts in wages and other payments to employees, staff layoffs and, of course, the application of various ‘optimization schemes’ - from those classic “under the table” payments to more sophisticated solutions.

What can the state do? Punitive measures such as raiding prosecutors or labour inspections? Tougher ‘salary commissions’? Obviously, this can only stifle entrepreneurial activity and increase corruption.

It is worthwhile remembering that, according to article 3 of the Tax Code, taxes should have an economic base that can to be economically justified, "bearable" to taxpayers. Arbitrary taxes are prohibited. The actual ability of taxpayers to pay the tax should always be taken into account.

The rates of national contributions must be reconsidered and if, not brought to their previous level, lowered and set at variable rates for different industries. This is clearly the right thing to do and would also be profitable to the state. The authorities may, perhaps for the first time, show they can admit their mistakes. This is very important and corresponds to the expectations of society and business.

As far as finding additional resources for pensions and social benefits goes, corruption is a very promising source. In anticipation of new rates of national contributions it was estimated that anti-corruption measures could bring up to $20 billion. As was recently reported in the media, only last year state officials ‘removed’ from the budget more than $25 billion (as we can see, this is more than the income from higher national contributions rates).

Just one specific case is the recent statement of the Accounts Chamber of the Russian Federation that $7.5 billion were stolen from the Moscow Treasury as well as allegations of embezzling of more than $900 million by housing officials in the Central Federal District.

An old proverb says ‘a penny saved is a penny gained’. By erasing theft from the budget we shall solve not only the pension problem but many other social issues as well. Hopefully, the President will find support for this action not only from the general public but from his team.

Should you have any questions, please do not hesitate to contact Nikolai Stepanov or Oleg Moskvitin on +7 495 783-74-50 at Muranov, Chernyakov & Partners.