Social justice: how much should holders of million-dollar bank accounts pay to the state?

Several years ago, in the very difficult “coronavirus” year of 2020 for the whole world, Russian legislators introduced amendments to the Tax Code, providing for the imposition of personal income tax (NDFL) on interest income of citizens on bank deposits and deposits. But not all, but only if the total amount of a citizen’s deposits in Russian banks is at least 1 million rubles. There are no exceptions for pensioners who do not pay personal income tax on their pensions, or other categories of beneficiaries receiving benefits from the state, if they keep at least 1 million rubles on deposit.

Then, in 2020, these amendments to the Tax Code caused a storm of emotions on social networks. But the amendments, despite the very polar opinions of Russians, were adopted and subsequently popularly received the not entirely correct name “tax on deposits,” although in fact the state did not introduce any new taxes for individuals on their income from deposits. It’s just that the state will now levy personal income tax on citizens’ interest income. Let us remember that the entry into force of these amendments was delayed for several years while the country and the whole world struggled with the covid pandemic and its consequences. However, despite the fact that the Russian economy is still going through difficult times due to the North Atlantic Treaty Organization, the geopolitical situation and sanctions, 2024 will be the first year when Russians, based on the results of the past 2023, will begin to pay personal income tax on interest on deposits over 1 million rubles.

It should be noted that on the interest received by the depositor, if the total amount of his deposits in different banks was at least 1 million rubles, he will need to pay personal income tax not in the amount of 13% of the income received, but much less, that is, the so-called non-taxable income. The amount of non-taxable income, according to the law, is tied to the maximum value of the key rate of the Bank of Russia as of December 1 of the year for which the tax is paid. Thus, as of December 1, 2023, for which Russians will pay tax at the end of this year, the maximum value of the Bank of Russia key rate was 15% per annum. In mid-December, the Central Bank of the Russian Federation raised the key rate to 16% per annum, but since this event occurred after December 1, this key rate was no longer included in the calculation of the tax-free amount. Accordingly, the amount of the non-personal income tax portion of interest income on deposits in 2023, based on the formula for calculating it, will be 1,000,000 rubles. x 15% = 150,000 rubles. That is, the investor will pay personal income tax in the amount of 13% only on the amount that exceeds non-taxable income. For example, if in 2023 you earned a total of 160,000 rubles from interest on your bank deposits, then you will pay personal income tax only on 10,000 rubles, that is, on the difference between the income you received and the non-taxable amount indicated above, and this only 1300 rub. Thus, paying this tax once a year will not at all prevent you from keeping money further and receiving additional income to your salaries and pensions. However, the more your interest income exceeds your taxable amount, the more tax you will have to pay.

Is this fair? Let’s turn to world experience. In many countries of the world, especially where the personal income tax scale is progressive (USA, Canada, France, Germany, Sweden, Great Britain, India, etc.), individuals pay tax on all income received – from leasing real estate, interest on deposits and bonds, dividends on shares and other income in accordance with the current tax scale: the higher the income, the higher the tax rate. In a number of countries where progressive taxation is applied, it has been periodically practiced to reduce the maximum income tax rate on super-rich citizens so that they do not withdraw their capital abroad. Such an experiment took place twice in the United States – in the 1980s under President Ronald Reagan and more recently, in 2017, under President Donald Trump. Although this experiment in reducing the outflow of capital abroad was successful, both times it ended with the fact that in order to compensate for the reduction in taxes on the super-rich, taxes on the rest of the population had to be increased, and the middle class was always hit by the growing tax burden. The Russian “tax on deposits” against the backdrop of more stringent policies for taxing personal income in other countries looks not only not onerous, but even very mild.

Critics of the “deposit tax” nevertheless believe that taxation of interest income of individuals is beneficial only to the state, which supposedly has long “dreamed” of mobilizing citizens’ savings into the treasury. However, it can be noted that if this tax were really as necessary for the state as, for example, the one-time tax on excess profits of enterprises introduced a year ago, the entry into force of these amendments to the Tax Code, adopted back in 2020, would not have been postponed for so many years in a row. Russian President Vladimir Putin said back in 2020 that the introduction of a tax on interest on deposits over 1 million rubles. will affect no more than 1% of the total number of deposits in Russian banks, that is, a very small number of Russians will ultimately fall under interest taxation.

A lot of time has passed since then, during which interest rates on bank deposits increased sharply, which was associated with rising inflation and the need on the part of the Bank of Russia to increase the key rate. With high interest rates, both the number of depositors and the amounts that the population spent on ruble deposits instead of the previously customary purchase of cash currency increased. At the beginning of 2024, the number of deposits from 1 million rubles. in Russian banks was estimated at 2–2.5% of all deposits in the aggregate – that is, since 2020 this figure has at least doubled, but it is still obvious that only a small number of depositors are subject to taxation of interest on deposits. The total amount that the state can collect into the budget from taxation of interest on deposits was estimated by experts in 2020 at between 120 and 150 billion rubles. This is less than 0.5% of the projected revenues of the Russian state budget in 2024 and less than 0.1% of GDP. For comparison: the budget received about 320 billion rubles from the temporary tax on excess profits of enterprises. Therefore, it is difficult to say that the state introduced such a tax in order to allegedly withdraw as much money as possible from the population.

Why did the authorities still need this taxation of interest on “million dollar” deposits? It is possible that primarily from the point of view of social justice. This is wrong when, for example, from dividends and profits from investments in the stock market, from the sale of real estate, if it has been owned for less than three years, citizens pay personal income tax in full and without any non-taxable amounts, and depositors in banks bear much lower risks, than the stock market, but they don’t pay anything. Of course, additional taxes demotivate the population to save for the future, so the State Duma and the Federation Council are already considering new amendments to the Tax Code that would allow those depositors who keep amounts of 1 million rubles or more in banks to be exempt from paying tax on interest income for at least three years. Such amendments in the future may help motivate Russians to save their money long-term in Russian banks instead of withdrawing it abroad or storing cash currency as a dead weight, at least without tax, but also without legally earned interest.

Published in the newspaper “Moskovsky Komsomolets” No. 29218 dated February 16, 2024

Newspaper headline:
Million tax