Russia’s tax cuts

Russia is the first country to announce tax cuts to combat the current financial crisis. While several countries have announced bail-out packages, no one has announced a tax cut yet.

Russia has announced a cut in corporate taxes though, and not personal income taxes. The Corporate Income Tax has been slashed by 4%. It will drop from 24% to 20%, beginning January.

The better news is for small businesses, who will see their tax rates go down from 15% to 5%.

These tax cuts are on top of the $200 billion bail-out package announced by the Russian government to help tide through the current crisis.

This is a good step forward and is expected to free up at least 15 billion dollars in the economy. It is interesting to note that no other government has announced a tax cut so far.

The primary reason for that seems to be that governments around the world have had to announce bail-out packages, which poke a hole in their budget. If corporates don’t have the money to pay their bills in the short term; they will be bankrupt much before the time comes for them to pay taxes.

The other reason for this is that tax revenues form a lower percentage of GDP for Russia than for most other countries. Sweden tops the list with about 51% and US is 26th with about 27%.

Russia may have the right idea as reducing tax rates for corporates will provide “stimulus” money to the economy without having to bail out incompetent managements. It won’t be surprising to see more countries follow Russia’s lead in the days to come.

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