A stepwise increase in personal income tax does not promise benefits to GDP

The prospect of strengthening the differentiation of taxation of personal income in the Russian Federation, in addition to replenishing the budget, which is important in connection with its new needs, estimated at 2 trillion rubles based on the results of the President’s message. per year, will have a negative impact on almost all macroeconomic indicators of Russia in all scenarios, except for a reduction in personal income tax rates compared to the current ones, states an article by economists from RANEPA and IEP, published in the “Financial Journal” of the Scientific Research Institute of the Ministry of Finance. The fact that the work was prepared before the message makes assessments of the impact of the proposed tax reform on GDP dynamics, labor, foreign trade and inequality only more valuable.

In the context of the prospects for expanding the use of a progressive personal income tax scale from 2025 discussed after the mention in the President’s message to the Federal Assembly (see “Kommersant” on March 1), the work “Scenario assessment of the macroeconomic effects of progressive taxation in Russia” (published in the peer-reviewed “Financial Journal” of the Scientific Research Institute of the Ministry of Finance ) is interesting in assessing the consequences of such changes in the tax system for GDP, consumption, labor and exports of the Russian Federation. The authors – Margarita Martyanova (RANEPA) and Andrey Polbin (RANEPA and Gaidar Institute of Economics and Economics) – consider three options for changing the personal income tax tax scale, leading to cumulative growth, maintaining or reducing the tax burden on individuals and the collection of this tax.

The most interesting conclusion of the study is that in all cases, and especially with an increase in the total tax burden, changes in rates have a depressing effect on economic growth and most macro indicators – GDP growth is ensured in the Russian economy only when the top rate of stepped personal income tax is reduced below the current level. This, we note, is indirectly confirmed by what has been happening in the Russian economy in recent years by the sharp increase in the influence of expanding social benefits and payments to the poor on aggregate demand.

The work, we note, was prepared outside the context of the message and the budget needs of an additional 2 trillion rubles estimated by analysts based on its results. in year. However, she states that the expected drop in oil and gas revenues against the backdrop of sanctions and the “green transition” and the growing interest in progressive taxation in the Russian Federation are “quite probable.” De facto, the transition to a progressive personal income tax has already occurred in 2021 (15% for incomes over 5 million rubles per year), and the development of “an economic and mathematical apparatus for assessing the macroeconomic effects of possible options for changing the progressive personal income tax scale in Russia” is relevant. The thresholds for applying the increased personal income tax rate at work were set in proportion to the average salary of 65 thousand rubles. and amounted to 30, 50 and 70 thousand rubles for different scenarios. before taxation (26.1, 43.5 and 61.9 thousand rubles “in hand” with the current personal income tax of 13% – that is, in any case, below the average salary).

Raising their rate to 20% or 25%, respectively, is said to “result in a loss of 0.3 to 1.3% of GDP in the long run, depending on the assumed rates and threshold” – and despite increased redistribution to low-income earners. income, total consumption in all cases decreases by 0.5–1.7%. “Neutral” option with maintaining personal income tax revenues at the current level due to an increase in the rate for high incomes and a decrease for low ones (equilibrium rates, according to the authors’ calculations, fall in the range of 9.25–26.25% with a threshold of 30 thousand rubles, 10.85–17.85% with 50 thousand rubles, 11.85–18.85% with a high rate of taxation of income from 70 thousand rubles per month) leads to a loss of 0.2% to 0.6% GDP in the long run. A stepwise reduction in personal income tax as the income of individuals decreases (8.75% up to and 15.75% over 50 thousand rubles/month or 10.65% up to and 17.65% over the threshold of 70 thousand rubles/month .) causes a decline in GDP by 0.05–0.07%. Its comparable growth is ensured only by the taxation of minimum income at a rate of 5.55% and its ceiling of 12.55% (that is, lower than the current one).

In addition, the introduction of progressive taxation to increase collections reduces the incentives to work among more efficient workers due to an increase in the tax wedge (the share of labor taxes in the employer’s expenses to pay for it), the authors note. As a result, transfers to households increase in all scenarios, but household consumption, on the contrary, decreases due to a fall in labor income. It also has “some negative impact” on hours worked for households with incomes below the threshold. The impact of the progressive scale on inequality (measured by the Gini coefficient) increases as the top personal income tax rate increases, but weakens as it increases further. At the same time, the aggregate savings rate decreases, which in the long term leads to a decrease in net foreign assets and an increase in the trade surplus due to a moderate decrease in exports with a sharper decrease in imports. In such conditions, the authors of the study note a smaller decrease in the output of exporters in comparison with sectors oriented to the domestic market.

However, among the “short-term” effects of progressive taxation there are also those that can be perceived positively by the population: for example, in all three scenarios immediately after the reform, household consumption is higher than in the new steady state. Salaries (as well as prices on the domestic market) increase in the first periods after the reform, although they then return to the original level. The reason is that a decrease in the supply of labor with a constant amount of capital in the short term increases wages, which causes an increase in the marginal costs of production, a decrease in profitability and an increase in prices, then a reduction in output, a decrease in wages and demand and a return to the original equilibrium.

Oleg Sapozhkov, Artem Chugunov