The Federal Tax Service released Thursday details about the first year of a ‘tax on the rich’. However, this is not a tax on billionaires. Since last year, income tax in Russia has risen to 15 percent (from a flat-rate 13 percent) for anyone earning more than 5 million rubles ($67,000) a year. The higher tax applies to all earnings above this threshold.
- Until this ‘tax on the rich’, a 13-percent flat rate of income tax had been in force since 2001. The adoption of this flat-rate greatly simplified the process of tax collections for an inefficient tax service, helped reduce the practice of ‘gray’ salaries when employees are paid in cash, and allowed the authorities to boast that Russia had some of the lowest taxes in the world (in reality, it’s not so simple — the tax burden was essentially moved from employees to businesses).
- In the end, the financial windfall from the tax change was just 82.7 billion rubles ($1.1 billion). That was a third more than planned, but still a relatively small amount when it comes to government spending. Half the funds were collected in Moscow.
- However, the goal of the tax was always less about fundraising and more to do with making a statement about social justice. Putin explained the tax increase at the time by saying that all the money raised would be donated to Circle of Kindness, a charity that pays to treat children suffering from rare illnesses. This sounded like a good idea, but, Russian bureaucracy being what it is, there were inevitable failures.
- One striking case emerged earlier this month. Before Circle of Kindness was set-up, the only way for Russians to access the world’s most expensive medication — Zolgensma — was via private donations (one Zolgensma injection can cure a child with spinal muscular atrophy). Late last year, four-year-old Mark Ugrekhelidze was among those fortunate enough to raise the required sum without state support.
- But red tape interfered. New prescription rules mean that Ugrekhelidze is no longer eligible for treatment. And Circle of Kindness (which is now the only entity that can purchase Zolgensma) insists that Russia’s criteria for Zolgensma are among the most lenient in the world, pointing out that unauthorized use can be life-threatening. It’s worth noting that lifelong treatment of spinal muscular atrophy with other drugs (some of which are also provided by Circle of Kindness) can, ultimately, be far more expensive than a single injection of Zolgensma.
Why the world should care: Dismantling Russia’s 20-year tax status quo to create the ‘tax on the rich’ has not raised a huge amount of money, although it has — with some exceptions — helped very sick children. It could be used as a template for future tax changes.