Russian Economic Reform

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34% — is it “Insurance” or “Tax”?

Published on July 02 2011
Posted by: jeff

“Business Russia”, a high profile lobby group representing companies outside the natural resources sector, has presented (World Bank) data to Group 6 indicating that the Russian 34% “insurance contribution” is much higher than in other countries. It also presented calculations on how to improve the position of the budget while reducing the rate. 

Jeff says that ….

(“Business Russia” argues that part of the “insurance contribution” is really a (hypothecated) “tax” and that this money should instead be raised by increased “excise”. Thus, this is as much a Group 6 issue as a Group 3 issue! I can only assume that the World Bank data is reliable – but so much depends on exact definitions! Some of the data on “property tax as a % of GDP” is a little surprising, and its ultimate source is not clear. A reliable 2006 Australian study indicated that “Australia has a relatively greater reliance on immovable property taxes (1.4 per cent of GDP) and transaction taxes (1.6 per cent) than the OECD-30 average (0.9 per cent and 0.6 per cent respectively). Transaction taxes are a significant revenue source for Australia’s state governments.” Thus, it would appear that the number that “Business Russia” quotes for Australia includes “stamp duty” on property transactions.)

“Business Russia” says that a large part of the 34% “insurance tariff” is not formulated on an individual right to receive compensation, and thus is not “insurance”. It says:

Fixed part of pension fund contribution (10%) is not of an insurance character

Individual part of pension fund contribution (16%) is of an insurance character

Medical insurance (5.1%) not insurance in character

Social insurance (2.9%) not insurance in character

“Business Russia” suggests lowering the “insurance tariff” (as it calls it) by 8 percentage points — so that the total falls from 34% to 26%.

It also has produced calculations on increasing the 463,000 ruble wage threshold (the “insurance contribution” is not paid on wages above this) and increasing excise on alcohol and tobacco to help compensate the budget for this.

Calculations on fall in income when insurance contribution lowered to 26% and threshold increased (all numbers are billions of rubles):

A.   Fall in income from lowering the rate to 26%

B.   Savings on budget spending by wider government on payment of contribution for government employees 

C.   Additional (in comparison with 26% on 463,000 rubles) incomes from increased threshold (taking into account annual indexation of threshold for nominal wage growth)

D.   Growth in tax on profits (Lower tax burden will increase profits of employers and increase wages (or business activity))

E.    Resulting net losses to budget

  A B C C D D E E
Year     To 660,000 rubles To 1,500,000 rubles When increase threshold to 660,000 rubles When increase threshold to 1,500,000 rubles When increase threshold to 660,000 rubles When increase threshold to 1,500,000 rubles
2011 842 226 192 314 85 60 340 242
2012 830 250 189 310 78 54 313 216
2013 923 276 210 344 87 61 350 243
2014 1026 310 233 383 97 67 386 266
2015 1148 345 261 428 108 75 434 300

 

Calculations on fall in income when insurance contribution lowered to 26%, and threshold increased, and excise increased (all numbers in billions of rubles):

A.   Net loss to budget with increased threshold. 

B.   Income from increasing excise on tobacco 

C.   Income from increasing excise on strong alcohol and beer 

D.   Resulting surplus (- deficit)

  A A B B C C D D
Year Threshold of 660,000 rubles Threshold of 1,500,000 rubles Estimate by “New Economic School” Estimate by “Business Russia” Estimate by “Gaidar Institute” Estimate by “Business Russia Minimum “excise” and threshold  660,000 rubles Maximum “excise” and threshold  1,500,000 rubles
2011 340 242 106 108 154 173 -80 40
2012 313 216 176 384 199 248 62 416
2013 350 243 289 504 289 322 228 584
2014 386 266 466 744 358 398 438 876
2015 434 300 742 800 387 440 698 940

 

“Business Russia” says that World Bank data (published in 2010) indicates that the rate of “insurance contribution” in other countries is much lower than Russia’s 34%. For Germany it is 22%, Switzerland 17.6%, Japan 14.7%, England 10.8%, USA 10%

“Business Russia” also provides a chart on “property tax as a % of GDP” in a number of countries. The numbers are USA 9%, UK 8%, Canada 8%, Japan 8%, Australia 4%, France 4%, Sweden 2%, Netherlands 2%, Germany 1%, Finland 1%, Russia 1%.