‘The Ministry of Finance used popular ideas: ‘Our oil companies are rich, might they pay a little bit more’’
The Finance Ministry’s new taxes: oil companies, smokers, metallurgy workers stand by
In September, the Russian Cabinet of Ministers offered new tax initiatives: it is offered to raise tobacco excises by 20%, increase mineral tax in metallurgy 3,5 times, augment the tax from 2% to 15% for those who offshore their companies’ business dividends. The plan for the cancellation of concessions for mineral tax for exhausted fields for oil companies can be especially painful for Tatarstan (including for Tatneft). According to the ideas’ authors, all these measures are considered to bring the state over 500 billion rubles. Doctor of Economic Sciences, Vice Director of the Institute of Economic Forecasting of the Russian Academy of Sciences Dmitry Kuvalin gives Realnoe Vremya an evaluation of the government’s ideas in an interview.
“The authorities spoiled their economy with tax concessions for one quarter and decided it was enough”
Mr Kuvalin, even though Russia has tackled the coronacrisis better than many other countries, can’t we anyway help but take such measures in the current situation? The budget is losing over a trillion with supporting measures for the population, tax deferral and reduction in insurance premiums so is the attempt to compensate for logical?
Not really, I think. A reduction in taxes is a standard action during a crisis. And this action took place in our country in the second quarter, at the peak of the pandemic. There was plenty of tax exemptions for small and medium-sized businesses, and these measures helped some save a business. They allowed the Russian economy to collapse not so much.
More importantly, in Russia we get out of a crisis relatively fast: the bounce was fast, and the comeback pace of the economy to the previous situation is good enough precisely thanks to the measures in taxes.
But the crisis hasn’t ended yet — the economy still has a lot of problems that appeared before the pandemic. The economy in Russia in particular had been growing very slowly, the population’s incomes have been falling for the seventh or eighth year, which this can’t be considered as a normal course of events. And measures stimulating economic developing are needed in such conditions. While the rise in taxes destimulates this development, and to be honest, I don’t understand the government’s act during the still ongoing crisis and consider it wrong.
Is the government perhaps get used to certain numbers of incomes and doesn’t want to see another picture?
There are two logics here — development logic and short-term accounting logic. Short-term accounting logic implies that it is necessary to balance incomes with expenses right now at any price — otherwise, where will we get money to cover the budget surplus? And it is a reasonable strategy of behaviour in this logic: today we are poorer than yesterday, but let’s tighten our belts, pay more taxes, spend less, but we will owe nothing to anybody.
But in the long-term development logic, it is a wrong approach — together with the rise in taxes, we strangle national production, economic activity and business. Because if an enterprise pays more taxes, it will likely try to save its employees’ salaries as well as payment for purchased components, feedstock, electrical energy. But how will they economise? They will invest less, repair equipment less — so the enterprise will stop. This is why the concept “let’s try to make our ends meet as soon as possible, level everything, live poorly and without debts” seems to me wrong, but precisely “accountants” have been winning in our country in the last ten years — those who are for fast development paces, modernisation have been winning. And it is no surprise here: the authorities spoiled their economy with tax concessions for one quarter and decided it was enough — it is necessary to go back to the hard-line financial policy.
Precisely “accountants” have been winning in our country in the last ten years — those who are for fast development paces, modernisation have been winning
“Popular ideas in accounting logic prevail”
The only thing we can say to justify those who made a decision on the new taxes is that they tried to load this tax burden on those who aren’t very socially disadvantaged in the current economic situation.
For instance what we can say: oil companies, of course, are already rich. Demand for oil is falling now, Russia is restricting oil production, consequently, oil companies don’t have to save tax concessions for tight oil because nobody needs this oil now. We could agree on such an idea partly if it is adopted for 3-4 years, no more. The concessions could return when the situation in the world oil markets changes.
However, experience illustrates that here in Russia additional taxes are imposed willingly, but they’re cancelled unwillingly, and here, of course, Tatarstan oil companies can justly mistrust such initiatives of our financial authorities. The measure is probably suitable in the short term, but in the long term, the cancellation of concessions is undesirable: tight oil and gas fields of Russia need to develop, while stimuli aren’t needed for this purpose.
Executives of oil companies wrote a letter to the Kremlin in August and indicated that the budget might lose 4,5 trillion rubles because of the cancellation of concessions and the imposition of the tax on additional incomes. Why didn’t they take the letter into consideration?
Because the Ministry of Finance used popular ideas: “Our oil companies are rich, might they pay a little bit more, smokers will also pay, then they will maybe smoke less”. While if your incomes are above 5 million rubles: “You’re a rich, wealthy person, you can pay as well”. Popular ideas in accounting logic prevail, while the fact that oil companies need money to develop capacities will be ignored, of course.
Can we say that oil companies in Russia are really very rich? So the Finance Ministry says that thanks to concessions on mineral tax oil companies have saved 200 billion rubles.
No. Here we can provide a famous fact as evidence that our oil and gas companies pay much more than metallurgists, who are, by the way, export-oriented in our country, regarding the total revenue. But their tax burden against revenue in percentages is much lower than that of oil companies — and this is a fact that’s hard to explain.
Even the new mineral tax for metallurgists, which has grown 3,5 times, won’t reach 3%, while oil companies’ tax will remain at 40-50. How come?
Oil and gas companies’ share of investment incomes, which are conditioned not by the quality of economic activity but favourable natural conditions, is considered to be higher. This is a fact, of course, but when the tax burden of the leading sectors is very different, this causes quite a lot of questions. This is why it is a very doubtful decision to add some tax burden to oil companies in this situation.
Oil and gas companies’ share of investment incomes, which are conditioned not by the quality of economic activity but favourable natural conditions, is considered to be higher. This is a fact, of course, but when the tax burden of the leading sectors is very different, this causes quite a lot of questions
Can the government meet oil companies halfway if a barrel costs less than $20?
In this case it goes without saying they will meet them halfway because such a price will increase oil companies’ problems. Of course, taxation in the oil and gas sector needs specifications, improvements — there is too much irrationality there, and the current tax rates need to be sorted out seriously, they need reconsideration.
Why do you think the tax measures bypassed not poor gas companies?
I think they decided not to bother gas companies because they were set a bigger task of large-scale gasification inside the country than ever. The previous gasification was very slow, expensive for the population, and this justly puzzled people: how come? We supply our gas abroad to increase the comforts of life of the population there, reduce emissions of the industry there, while we deal with it in our country half-heartedly? And so why do we need such high gas export incomes if we don’t spend them to improve the quality of life inside the country?
So the task of gasification of the whole country was finally set. As this will require additional costs from gas companies, they weren’t imposed additional taxes so that gasification won’t be too costly for the population.
“The taxes could have certainly not been raised for one or two years”
Could you say if the taxes could have not been raised for one or two years with the current financial reserves of Russia?
The taxes could have certainly not been raised for one or two years — we have sufficient reserve funds. And even the budget rule could have been softened in these conditions (Editor’s Note: in the current budget rule, the National Wealth Fund starts spending to support the economy if only oil is below $42 per barrel), not introducing new taxes.
What does the world practice say when it is really necessary to raise taxes? When might such measures be justified in our country?
If the economy has been developing at a good pace for long, elements of “overheated” economy come about — when signs of Dutch disease appear (a situation when prices for goods and services in the country become higher than world prices). Then tax leverage could be applied to avoid undesirable processes and undesirable structural changes in those sectors and those spheres of activity whose fast development isn’t desired.
I’ve seen proposals on transborder capital flow: these transactions are taxed higher to moderate the activity of financial speculators who can bring money to a country and then unexpectedly withdraw it by creating problems in financial markets. So these transborder transactions will lose their power and won’t be harmful for the national economy.
Or, for instance, let’s take a situation when the differentiation of the population’s incomes gains speed — here it is quite suitable to raise taxes for high-income people, introduce the so-called progressive income tax we don’t have in general yet. It goes without saying that neither the poor nor the middle class have to be hit, the progressive scale must ensure that well-off people will be the main defeated people.
Let’s take a situation when the differentiation of the population’s incomes gains speed — here it is quite suitable to raise taxes for high-income people, introduce the so-called progressive income tax we don’t have in general yet
“Tobacco and alcohol consumption in the country must become more expensive”
What do you think about the rise in the cigarette excise rate?
Yes, now the Ministry of Finance decided to impose an additional tax burden on smokers. We can agree on this partly because tobacco and alcohol consumption in the country must become more expensive — then people will become ill less and live longer.
Of course, medical problems can never be solved purely economically, but excises probably can make their contribution.
Why haven’t excises on alcohol been raised then?
Popular ideas dominated here as well — illegal tobacco production in Russia is very limited, while illegal alcohol production is quite widely spread. And if we raise the price for legal alcohol, we run the risk of having an upsurge in illegal production. They decided not to raise alcohol excises perhaps out of these fears.
Indeed, this year we have seen some progressive change in income tax — people whose income is over 5 million rubles will pay 15%, while the money must be spent to help children with orphan diseases. Will the practice of tax raising for wealthy citizens go on in the next years?
I don’t dare to say that we will have a progressive taxation scale in the middle term. And I think that upper rate can be higher than now — the case is that now citizens find it harder to stay clear of fiscal control than before. There are more technical possibilities to control real incomes. I think the Finance Ministry and tax inspection will take advantage of wider digitalisation of financial flows, settlement via bank cards, online accounts in the middle term.
But the main factor of the introduction of such a scale is the factor of social justice, and it is no secret that our differentiation of citizens’ income is so that it shouldn’t be this way, to put it mildly. The global approach here is increased taxation of the richest people.
I think that it will be fine in our conditions if the income tax rate for the rich is 20-25% and 13% for the majority. Tax “thresholds” must be created not to hit the middle class. Might the middle class grow for some 30 years — it is too small in Russia.
The main factor of the introduction of such a scale is the factor of social justice, and it is no secret that our differentiation of citizens’ income is so that it shouldn’t be this way, to put it mildly. The global approach here is increased taxation of the richest people
What does the government go by when making a decision to cancel or impose taxes?
It is hard to say how our financial authorities take some measures — the ruble rate, budget ruble, the same taxation rates. This sphere is opaque enough, moreover, people there are bad at explaining their measures not only to the population but also experts.
Logic is seen at times, but rarely. Our financial authorities consider it fine and correct to make such decisions so that neither the public nor the economy doesn’t manage to get ready for them. In fact, this is wrong, of course — they should cooperate with their population and their community of entrepreneurs, not shock them with some sudden and bizarre decisions.