IMF Warns Russia Not To Weaken Fiscal Balance Through Tax Cuts

by Tatiana Smolenskaya, Tax-News.com, Moscow

25 June 2003

On a recent visit to Russia, Ann Kreuger, Deputy Managing Director of the International Monetary Fund (IMF) warned the government not to de-stabilise its fiscal apparatus in the process of reforming its tax regime.

Speaking at a press conference last week, Kreuger revealed that she is generally supportive of the federal government's policy of economic liberalisation, and observed that it will lead to greater distribution of economic growth from the large monopolies to other sectors of the economy.

"However," the IMF representative announced, "I want to caution Russia against significant weakening of fiscal politics. I think that extreme regulation and corruption are much more difficult over time for the economy than high taxes and precisely these problems must be decided at first."

'Russia is conducting not the most ideal fiscal politics,' Kreuger observed, noting that the country's unified social tax, an contributions-based levy paid by firms, is too high and suggesting that it would benefit the economy if the tax was lowered.

Recently, deputies voted for cuts in unified social tax which will mean that the rate paid by employers on wages under 50,000 roubles per year will fall to 30% from 35.6%. On salaries from 50,000 roubles to 600,000 roubles, the rate will be 15%, and above 600,000, it will fall to 5%. The initial plan drawn up by the Finance Ministry had called for a flat rate of 26% on all levels of income.

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