PUBLIC FINANCE DOI: 10.15838/esc.2016.6.48.11 UDC 336.14, LBC 65.261.713 © Povarova A.I. Reforming Individual Income Tax Is the Crucial Factor in Stabilizing the Budgetary System Anna Ivanovna POVAROVA Institute of Socio-Economic Development of Territories of RAS 56A, Gorky Street, Vologda, 160014, Russian Federation [email protected] Abstract. The reason for writing this article was a statement of the First Deputy Finance Minister Tatyana Nesterenko who claimed that in 2017 the government would run out of money to pay salaries to budgetary sphere employees [3]. Indeed, the reserves accumulated in the fat years are running out1. The Government of the Russian Federation finds the following sources to cover the growing budget deficit: first, privatization of the remnants of state property, which will create a momentary effect and will not become a stable channel for filling the treasury; and second, major cuts on spending that on the eve of the electoral cycle can aggravate protest moods of Russians caused by a sharp deterioration of the standard of living. The majority of representatives of the expert and scientific community, including ISEDT RAS employees, consider the urgent need to reform the system for taxation of individual income tax by introducing a progressive tax scale as one of the main solutions to the growing imbalance of the budgetary system. This scale is applied successfully in all the countries of the OECD, G20 and BRICS. The goal of the present paper is to substantiate the need for reformation of individual income tax as a driving force of sustainable mobilization of budget funds. As a hypothesis, an assumption is made concerning the existence of a direct link between the redistribution of income through progressive taxation and an increase in the resource potential of the 1 According to the Finance Ministry, from January 01, 2015 to August 01, 2016, the volume of sovereign funds of the Russian Federation decreased by 21%. Available at: http://minfin.ru/ru/ For citation: Povarova A.I. Reforming individual income tax is the crucial factor in stabilizing the budgetary system. Economic and Social Changes: Facts, Trends, Forecast, 2016, no. 6, pp. 193-213. DOI: 10.15838/esc/2016.6.48.11 Economic and Social Changes: Facts, Trends, Forecast 6 (48) 2016 193 Reforming Individual Income Tax Is the Crucial Factor in Stabilizing the Budgetary System budgetary system. Research findings presented in the paper confirm that the current mechanisms for taxation of people’s incomes do not correspond to the constitutional principles of equality, social orientation and economic viability. As a result, judging by the most important indicators of socio- economic development, Russia lags behind developed countries and some comparable developing countries. Excessive income polarization brings to the fore the issue concerning individual income tax modification. The Russian leadership ignores the introduction of progressive taxation of individual income. Meanwhile, according to the most approximate calculations, if incremental taxation rate is applied to the incomes of 77 super-rich Russian businessmen, it will help replenish the budget by 2.2 trillion rubles that will solve the debt crisis issue in Russia’s regions, and in the future – significantly reduce the level of subsidization and dependence on the federal center. Key words: income taxation, progressive tax, flat rate for individual income tax, budgetary system, income differentiation, reforming individual income tax. Taxation of the incomes of physical money income and real wages – showed a persons is one of the most important negative trend (Fig. 2). revenue sources, it generates more than The deterioration of people’s financial 10% of the revenues od the consolidated situation resulted in a sharp increase in budget of the Russian Federation and 40% the number of regions with a decreasing of the tax and non-tax (own) revenues of trend of individual income tax receipts regional budgets. However, in 2010–2015 in 2015 – to 23 against two in 2014. For there was a sharp slowdown in average example, the collections of payments annual growth rate of individual income decreased in the half of the constituent tax revenues – to 2.3% vs 17–27% in entities of the Northwestern Federal previous years (Fig. 1). At the end of 2015, District (Tab. 1). the dynamics of receipt of these payments Of course, the negative trends observed moved into the negative zone. in the dynamics of mobilization of the core A slowdown in the growth rate of tax revenue source of sub-federal budgets collections occurred in the conditions of indicate that problems in the regional increasing crisis phenomena in the Russian economy are accumulating and there exist economy that aggravated in 2015. On serious threats to stable receipts of own the backdrop of a decline in all the revenues. However, in our opinion, it is major macroeconomic indices and a not entirely correct if the decline in a fiscal simultaneous inflation leap2, the sources function of income tax is explained only by of tax base for individual income tax – real the general deterioration of the economy. The real reasons lie in the mechanisms for 2 As of the end of 2015, GDP decreased by 3.7%, legal regulation and tax administration of industrial production – by 3.4%, investments in fixed capital – by 8.4% at inflation growth being 12.9%. individual income tax. 194 6 (48) 2016 Economic and Social Changes: Facts, Trends, Forecast PUBLIC FINANCE Povarova A.I. Figure 1. Dynamics of the growth rate of individual income tax receipts to the consolidated budget of the Russian Federation in 2000–2015, % to the previous year in comparable prices 30 26͘9 25 20 16͘8 15 10 8͘0 4͘4 4͘6 5 2͘3 1͘1 2͘2 0 -5 -10 -6͘7 2000-20042005-20092010-2015 2010 2011 2012 2013 2014 2015 Sources: Federal Treasury. Available at: http://www.roskazna.ru/; author’s calculations. Figure 2. Growth rate dynamics of real money incomes and real wages in 2000–2015, % to the previous year 25 20͘9 17͘2 20 16͘2 12͘6 15 11͘5 8͘4 12͘4 10 12 0 12͘1 ͘ 11͘0 4 8 2͘8 ͘ 5 3͘0 1͘3 2͘4 4͘6 4͘0 0 0 5 ͘ -0͘8 -5 -4͘3 -3͘5 -10 -9͘3 -15 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 ZĞĂůŵŽŶĞLJŝŶĐŽŵĞƐŽĨƚŚĞƉŽƉƵůĂƚŝŽŶ ZĞĂůǁĂŐĞ Source: Federal State Statistics Service. Available at: http://www.gks.ru/ Economic and Social Changes: Facts, Trends, Forecast 6 (48) 2016 195 Reforming Individual Income Tax Is the Crucial Factor in Stabilizing the Budgetary System Table 1. Individual income tax receipts to the budgets of constituent entities of the Northwestern Federal District in 2013–2015 2013 2014 2015 Constituent entity Billion rub. To 2012, % Billion rub. To 2013, % Billion rub. To 2014, % Saint Petersburg 149.5 112.1 164.7 110.2 181.0 109.9 Leningrad Oblast 25.8 108.9 28.7 111.2 30.1 104.8 Murmansk Oblast 24.3 110.6 24.9 102.3 25.9 103.8 Kaliningrad Oblast 13.4 112.2 14.3 106.7 14.7 102.6 Novgorod Oblast 8.2 109.3 8.6 104.8 8.7 101.7 Komi Republic 22.7 107.4 22.1 97.2 21.9 98.9 Pskov Oblast 7.3 110.5 7.6 104.1 7.5 98.2 Arkhangelsk Oblast 22.5 105.8 23.7 105.7 23.2 97.7 Vologda Oblast 16.8 104.4 17.7 105.2 17.2 97.4 Karelia Republic 10.1 109.6 10.5 103.6 10.1 96.8 NWFD 301.2 110.4 323.9 107.5 342.7 105.8 Russian Federation 2499.1 110.5 2680.8 107.3 2787.7 104.0 Sources: Federal Treasury data; author’s calculations. Tax administration, as an organizational collection averaged 50%, and it showed a and managerial system that implements tax declining trend. As a result, the regional relations, includes the set of regulation and budget has not received more than 12 control methods, the use of which must trillion rubles over this period (Tab. 2). ensure the receipts of planned tax revenues The low level of individual income tax to the budget. The level of tax collection collection indicates improper quality of its is a well-known indicator of the quality of administration. The potential of this tax is tax administration. not implemented to the fullest extent According to our estimates, in 2011– because of the existing system of income 2015, the level of individual income tax taxation. Table 2. Level of individual income tax collection in 2011–2015 Total for Indicators 2011 2012 2013 2014 2015 2011–2015 Tax base trillion rubles* 15.4 17.4 19.2 20.6 21.4 94.0 Consumer spending, trillion rubles 29.9 34.0 38.1 41.8 43.8 187.6 Level of collection of individual income tax, %** 51.5 51.1 50.4 49.0 48.9 50.1 Estimated inflow of individual income tax receipts, trillion 3.9 4.4 5.0 5.5 5.7 24.5 rubles Actual inflow of individual income tax receipts, trillion rubles 2.0 2.3 2.5 2.7 2.8 12.3 Shortfall in individual income tax receipts, trillion rubles 1.9 2.1 2.5 2.8 2.9 12.2 * Calculated by dividing the collected individual income tax by the value of the tax rate equal to 13%. ** Calculated as the ratio of the tax base to consumer spending. Source: author’s calculations according to the Federal Treasury and Rosstat data. 196 6 (48) 2016 Economic and Social Changes: Facts, Trends, Forecast PUBLIC FINANCE Povarova A.I.