It is now some months since President Medvedev directed that some way be found to lower the 34% “insurance contribution” on wages up to the threshold – in 2011 – of 463,000 rubles per year.

How to achieve this has turned into a protracted dispute between ministers and officials from the ministries of “Health and Social Development”, “Economic Development” and “Finance”. The latter has finally gained the support of Deputy Premier Igor Shuvalov and Vladimir Putin for its variant, and a report has been prepared for Medvedev.

The Ministry of Finance, under Alexi Kudrin, suggested a new scale with the general rate being lowered from 34% to 30%, and with the introduction of a new 10% rate for wage payments about the threshold limit (which will rise to 512,000 in 2012 because of indexation for inflation associated wages growth). “Small business” will get a “discount”, in the form of a general scale of 20%, and a 7% rate above the threshold.

The Ministry of Economic Development had opposed the addition contribution and wanted this amount to be compensated from the Federal Budget. The Ministry of Health and Social Development had opposed the additional contribution by small business, but not for medium and large business.

The president’s assistant for economic issues, Arkady Dvorkovich, has reportedly “promised to fight to the bitter end” against the Ministry of Finance idea of the additional contributions of 10% and 7%. (He earlier had accepted, it was reported, the idea of an additional 5% contribution as part of a variant that included compensating the Pension Fund from, among other ways, privatization receipts.)

Medvedev may need to meet with Putin and relevant ministers to resolve this issue. Although the changes “formally” meet the demands of Medvedev to lower the rate, the amount of tax to be paid actually increases for many businesses.

The table below, taken from “Vedomosti”, shows the size of the effective “insurance contributions” if the rate were to remain at 34% in 2012 and the size under the Finance Ministry’s “30+10”% plan. (The “effective” rate is calculated by dividing the amount of rubles paid as “insurance contribution” by the amount of rubles paid as wages, and expressing the result as a percentage.)

For wages up to 60,000 rubles the effective rate is lower under the proposed new scale. According to data from the Centre for Labor Research at the Higher School of Economics, about 91% of workers in medium and big organizations receive 45,000 rubles or less. I keep reading about Russia’s relatively high labor costs in the reports from the Expert Groups and a decline from 34% to 30% — albeit small – will help.

The Ministry of Economic Development says that the changes will hurt high technology companies, including those carrying out modernization of production with more highly qualified personnel. But, it seems to me that any effect here will be outweighed by the positives of the reduction in other areas.

In my view, the “30+10” plan is superior to the existing “34%” because the rate sale is less regressive (ie the percentage rate declines less quickly as the amount increases). Having said this, the rate scale will necessarily be regressive to some degree because 8 of the 34 (or 30) percentage points are related to medical and unemployment insurance (costs of these to not rise with rising wages) and 16 percentage points are related to individual pension rights accumulation. Only the remaining 10 (or 6) percentage points is related to general pension fund accumulation (as a hypothecated “tax”) – but there is no good reason why it should suddenly cease to be paid at the threshold limit as is the case under the existing 34% rate.

I cannot understand why Dvorkovich would want “to fight to the bitter end” on this issue. It may be because the issue has become so “political” – as was noted by one official who spoke to “Vedomosti” – and that Dvorkovich feels that he is defending the position of Medvedev. (As I have noted in other commentary on this site, Dvorkovich has also publicly disagreed with Kudrin on the issue of a regional sales tax.)

But Kudrin will miss no opportunity to remind Medvedev about the effect on the Pension Fund.

According to “Vedomosti”, the report to Medvedev indicates that a reduction in the general rate to 30% will reduce Pension Fund receipts by 391bn rubles in 2012 and 441bn rubles in 2013. (Even without the lower rate, the Pension Fund deficit was expected to be 1.06 trillion rubles in 2012 and 1.19 trillion rubles in 2013.) The additional contributions (ie 10% and 7%) will compensate for only a little more than 40% of the fall – 166 billion in 2012 and 184 billion in 2013.