Wednesday, March 07, 2007

RUSSIA IS CONSIDERING A CORPORATE TAX CUT

Tax-news.com reports that Russian policymakers may cut the current corporate tax rate from 24 percent to 20 percent on behalf of a three-year tax policy plan. While the the Ministry of Finance intended to cut the value-added tax as well (from 18% to 13%), it still decided to further reduce the corporate tax burden in the GDP. Corporate tax cuts will supposedly leave a positively stimulating impact on the increase of economic growth. Greater capital formation, which is one of the foremostly essential ingredients which boosts investment level and thus stimulates economic growth, may attract larger volume of foreign investors. Greater investment participation and the growth of returns significantly stimulate job creation, higher profit rate as well as wage growth.

Policymakers in Russia have announced the launch of gas market liberalization where prices are now fixed and held temporarily low by the government. According to the abovementioned source, the introduction of some new taxes has been addressed to balance the budget deficit. This view is of course very much static. Balancing the budget to ensure the vitality of public finances can be achieved through the curb of GDP spending.

Since 2002, Russia has sustained tremendous economic growth stimulated by the abolishment of many taxes and by the introduction of the 13 percent flat tax on the individual income. The lowering of the corporate tax rate resulted in business-friendlier investment environment. Years after the introduction of the flat tax, total individual tax receipts have more than doubled and the number is still growing. After adjusting for inflation, individual income tax revenues increased 25,2 percent in 2001, 24.6 percent in 2002, 15,2 percent in 2003 and more than 16 percent in 2004. The revenue expansion has resulted from less-discriminatory tax system, reduced tax evasion and sheltering, and increased incentives to work, save and invest.

The real GDP growth was constance since the flat tax reform in 2001; 5,1 percent in 2001, 4,7 percent in 2002 and 7,3 (!) percent in 2003. The average annual real growth rate in Russia over the last three years averaged 5,5 percent which more than the average real growth rate in many developing countries.

Revenue-neutral and supply-side tax policy cannot, of course, solve all the problems which Russia is now facing, but it's a progress in the productive direction.

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