A progressive tax is not only about fairness: a sign of a developed economy

The system of progressive taxation, to which, judging by statements from the Kremlin and the State Duma, Russians are planning to transfer in the near future, is widely used in the world, and by and large is a distinctive feature of developed economies. However, in its quest for complete sovereignty, Russia seems to intend to take a “different path” here too. It is already clear that the authorities are not considering introducing a tax-free minimum income, which exists in almost all European countries, as well as in the USA and China. There are still too many questions regarding the tax scale. And the system of deductions, designed to reduce the fiscal burden on Russians, currently looks rather modest.

A quick analysis of the tax legislation of foreign countries allows us to come to the conclusion that developing countries mainly use a flat scale and relatively low rates. Whereas developed economies most often introduce a progressive tax, the upper limit of which can reach 50% or higher. Progressive income taxation was first introduced in Great Britain in the late 18th century. In the 19th it was used in some European countries, in particular during the Napoleonic wars. By the beginning of the 20th century, the progressive scale had already become commonplace: the United States introduced it in 1913, and Tsarist Russia was going to introduce it in 1917 (following the Prussian model), but these plans were prevented first by the February and then the October revolutions. However, when in 1922 the Bolsheviks finally issued a fiscal decree, the income tax also turned out to be progressive – the rates were revised several times during the existence of the Soviet Union. For example, in the 1990s, citizens had to give the state from 12% to 30%, until in 2001 a decision was made on a single personal income tax of 13%.

Currently, about 25 countries use a progressive scale, most of which use a multi-stage model, when the state’s percentage increases step by step with the growth of taxable income. In other words: if a person receives from $20 to $30 he pays 5%, from $30 to $40 – 10%, from $40 to $50 -20% and so on. But with one important condition – the increased rate is not imposed on the entire income as a whole, but only on that part that exceeds the limit of the previous stage. In our example, if a person earned $35, then from $30 he will pay 5%, and 10% will be taken only from the remaining $5.

The number of steps may be small – for example, in Poland there are only two. And reach 18, as in Luxembourg. In many countries, a multi-stage scale implies the presence of a minimum personal income tax-free income (In our case, this is everything that does not exceed $20). In addition, there are nuances related to marital status, the presence of children, and obligations for other payments. Also, the final amount of tax is significantly influenced by all kinds of deductions – and in some countries they are given for such exotic things as commuting to work by bicycle, helping farmers and donating to charity.

Germany has the most complex taxation system. There, the entire population is divided into 6 tax classes, for which different levels of collection and a list of required social services are established. The first class is single people without children, the second class is single people with children, the third class is married couples with one worker, the fourth class is married couples where both work, the fifth class is married couples where one of the workers has an income above average, the sixth class is where both partners they earn decent money. The tax-free minimum – 11.6 thousand euros in 2024 – applies to all classes except the fifth and sixth. Everything above the minimum is taxed at rates from 14% to 42%, the specific value depends on many nuances. (According to statistics, the vast majority of Germans give about 30% of their income to the state). Income over 66,760 euros (6.7 million rubles) per year is subject to a flat tax of 42%, those who have more than 277,826 euros (22.8 million rubles) pay 45%. In addition, in Germany there is a so-called “solidarity tax” and other contributions (for example, the responsibility to make insurance payments partially falls on the employee himself). On average, before taxes, Germans earned 4,100 euros (410 thousand rubles) per month in 2023, the minimum wage in the country is 1,600 euros (160 thousand rubles). Average earnings are growing by about 6-7% per year.

The highest taxes in Europe are in the Scandinavian countries. Let’s take Denmark as an example. There, income tax consists of state (progressive from 12 to 15%) and municipal (fixed), the rates of which vary from municipality to municipality (on average 24%). Before income tax, all Danish income from employment or self-employment is subject to a labor market contribution of 8%. Also, the Danes independently make contributions to the pension fund (4%) and pay a fixed social contribution, which depends on the amount of earnings and various circumstances. The total maximum rate must not exceed 52%.

In Denmark, there is a non-taxable income tax (except for 8% on the labor market) of a minimum of 50 thousand kroner (667 thousand rubles). In addition, at the end of the year, citizens can receive back part of the amount paid as compensation for travel expenses to work and expenses for maintenance of the spouse if she (he) for some reason does not work. Municipal income tax also applies a complex and extensive system of tax deductions. The Danes, as a rule, have half (and the rich have less than half) of the amount paid as income taxes and other contributions, but this money is quite enough for a comfortable, comfortable life. (The average salary in Denmark is about 40 thousand crowns or 542 thousand rubles per month) In addition, it is obvious to everyone who has been to Denmark that taxes are spent on the right things: the country has ideal roads, practically free medicine, which is at a very high level, free education, high benefits for the disabled, developed social security, comfortable homes for the elderly, etc.

In the United States, citizens also pay several types of taxes – federal, state and local. The total amount depends on income, city of residence, age and marital status. We will not go into local taxes, but as for the federal personal income tax, it is levied on a progressive scale consisting of seven steps. In these seven steps, the rate rises from 10% (which a single American with an income of up to $11.6 thousand will pay) to 37% (for those earning $609 thousand or more). However, as already noted, the maximum rate will not apply to the entire half a million, but to the amount that exceeds the upper limit of the previous stage.

The United States also has a non-taxable minimum federal tax, the amount of which varies depending on the age and marital status of the taxpayer (for single people in 2024, about $14 thousand). In addition, for many categories – military, citizens paying a mortgage, working students, those caring for incapacitated relatives, etc. – tax deductions have been established. The average monthly salary in the US before taxes in 2023 was about $4.7 thousand (about 56.5 thousand per year), it is growing by about 6% per year. Along with health insurance, Americans typically pay about a quarter of their income to the government.

China did not reinvent the wheel: the authorities of the Celestial Empire have long been using a seven-stage progressive tax scale only with its own gradations. The income of poor Chinese (those who earn less than 36 thousand yuan or 460 thousand rubles per year) is taxed at a rate of 3%, and local nouveau riche (with incomes of more than 960 thousand yuan or 12.2 million rubles) pay 45% to the state. The Chinese, who earn 1 million in rubles, pay less than 10%.

The minimum non-taxable threshold is small – 5 thousand yuan (63 thousand rubles). They are deducted before calculating income taxes. However, China has a powerful system of tax deductions, which are available to almost every resident. Benefits can be obtained for expenses on children’s education, continuous self-education, expensive surgeries, renting housing, paying off mortgage loans, caring for incapacitated relatives, etc. All of them are applied independently of each other and are added together. If deductions are equal to or greater than earnings, no tax is actually paid.

Little is known yet about what progressive taxation will look like in Russia. However, leaked information allows us to conclude that there will be no minimum non-taxable income (for example, in the amount of the minimum wage or at least half of it). This, as experts say, threatens too large losses – more than 1.2 trillion rubles – for the budget, while the goal of the reform is to increase revenues by a multiple.

The gradation of rates and the methodology for their application also still raises more questions than answers. According to the Chairman of the State Duma Committee on the Financial Market, Anatoly Aksakov, the 15% rate “can be applied starting from an annual income of 1 million rubles” or 83.3 thousand rubles per month. “And if a person earns more than 5 million rubles, then 20%.” However, from these words it is not clear what exact amount will be subject to increased tax – the entire 1 million rubles, or only that which exceeds the previous level (and what, by the way, it will be).

As for tax deductions, in addition to the existing deductions for education (in total in 2024, no more than 33.8 thousand rubles can be returned) and medical expenses (no more than 15.6 thousand rubles), the authorities promise to increase tax deductions for parents two or more children. However, the benefit will not be provided all the time, but until income from the beginning of the year exceeds 450 thousand rubles. For those receiving an average salary (RUB 73.7 thousand) this will happen within 6 months.