DUMA SET TO CONSIDER THE FLAT TAX…

The State Duma was set today to consider the government’s plan to reform Russia’s tax system, but President Vladimir Putin was forced to postpone the debate over one of the plan’s key provisions–a new social tax. The government has introduced bills which would institute a flat income tax rate of 13 percent, reduce the aggregate payments made by employers into the pension and social insurance from 38.5 percent to 35.6 percent and replace the current system separate payments into the country’s various off-budget social contributions funds (pension, social insurance and medical insurance) with a single social tax. However, due to resistance both from within the government and from the country’s labor unions, Putin was forced today to withdraw the social tax proposal from the Duma (Russian agencies, June 7). This was the second time in a week that the government has been forced to retreat on the issue. At the end of last week, Deputy Prime Minister Valentia Matvienko, the cabinet member who oversees social policy, reportedly managed to get consideration of the tax reform package put off until today by phoning State Duma Speaker Gennady Seleznev directly, bypassing both Prime Minister Mikhail Kasyanov and Deputy Prime Minister Aleksei Kudrin. Matvienko was apparently trying to thwart the plan to create a single social tax, which would essentially take billion of dollars worth of payroll taxes out from under her supervision and hand them over to the Finance Ministry (Moscow Times, June 3).

Russia’s labor unions have also criticized the single social tax initiative rather strongly, arguing that it will leave too little money to cover such things as sick leave and maternity leave. Mikhail Shmakov, leader of the Federation of Independent Trade Unions (FNPR), charged that the single social tax will “radically lower the living standards of Russians, and workers will be robbed of social support” (Vlast, June 6). Several hundred representatives of various unions demonstrated today against the single social tax outside the Russian White House (Russian agencies, June 7). Aleksandr Kotenkov, Putin’s representative in the Duma, said today that “certain forces” which “do not want to lose control over financial flows” are opposing the government’s proposal to merge social funds payments into one social tax. While Kotenkov said that he did not know of specific instances of Duma deputies being pressured to vote against the measure, he implied that the Communist Party of the Russian Federation (KPRF) faction in the Duma was working in conjunction with the FNPR in trying to derail the government’s proposed tax reforms. Aleksandr Zhukov, head of the Duma’s budget committee, said yesterday that the government had agreed to a compromise whereby social and medical insurance payments would be merged starting next year, but payments into the pension fund would remain a separate item until 2003 (Russian agencies, June 6). Those concessions evidently did not satisfy the Duma critics of the new social tax. Indeed, even some of the factions which support the government’s overall tax reform efforts are not enthusiastic about the idea of consolidating payments into the off-budget social funds. Yabloko, for example, supports the flat tax, but the leader of its Duma faction, Sergei Ivanenko, said that the party would support the unified social tax idea only after it receives guarantees that it will not “worsen the situation of certain social groups” (Vlast, June 6). The Duma is now scheduled to debate the issue on Friday, and Matvienko is set to meet with union representatives prior to that (Russian agencies, Reuters, June 8).

The Duma, meanwhile, was set to go ahead today with its second reading of proposed flat tax legislation. Despite the fact that the KPRF has the largest Duma faction, Zhukov predicted yesterday that the Duma would approve the flat tax, which is supported by the Unity, Union of Right-Wing Forces and Yabloko factions (Vlast, June 6). The Duma considers a bill in three readings, after which it must be approved by the Federation Council, the upper chamber of parliament, and then signed into law by the president. Some members of the Federation Council, meanwhile, have expressed their reservations. Sergei Sobyanin, the head of its constitutional law committee, noted that practically all revenues from the income tax remain at the local level and are used to finance health care, education and housing maintenance. Sobyanin said the flat tax would simply force local administrations to raise local taxes (Vlast, June 6).

…WHICH, THE GOVERNMENT HOPES, WILL SHRINK THE “SHADOW ECONOMY”.