Taxing the Rich(er): Where to Draw the Lines?

Over the past several months, very interesting and quite telling developments have been taking place on the political scene in Kazakhstan as the government has been takingsteps to increase budget revenues while decreasing budget expenditures in the next few years.

In the spring, the country was abuzz with the much debated pension reform law that sought to raise the retirement age for women from 58 years to 63 years, the same as for men. After much discussion and small scale but high-profile protests, and after several revisions in the parliament, the law was passed in June only after President Nursultan Nazarbayev interjected himself into the process and called for the postponement of this provision’s entry into force until 2018 and the gradual increase of the women’s retirement age by five years over the 10-year period after 2018.

While Kazakhstan’s pension system, modeled after the Chilean system, puts the onus of accumulating pension savings on employees themselves, rather than on the state, proposed changes were seen by many economists as a preemptive move by the state to prevent economic upheavals given the expected shortfall in pension savings in a few years inlight ofthe continued aging of the population and expected retirement of larger percentages of workers. The president had also earlier criticized, quite fairly, private pension funds for poor performance and lack of investment in the national economy. Hence,another much debated provision to consolidate all pension savings from private funds into a single Unified National Pension Fundwhich wasapproved by the parliament.

Then in September came another proposal from the government to raise taxes by several times on cars with engine volumes above 3,000 cubic centimetres and by three times on apartments larger than 150 square metres and houses larger than 300 square metres. The government’s arguments, articulated on several occasions by Minister of Economy and Budget Planning Yerbolat Dossayev, were based on the premises that such a system would levy additional taxes only on the lavishly wealthy while remaining fair for the rest of society.

Then came the Oct. 4 meeting of the Nur Otan ruling party faction in the Mazhilis of the Parliament where the chamber’s Speaker, Nurlan Nigmatullin, who represents the same President Nazarbayev-led party that the majority of ministers and members of Parliamentbelong to, lashed out at the government for miscalculating the move with the taxes.

“The bill (to introduce amendments to the tax code) raised serious questions among both the public and deputies,” Nigmatullin said. “The biggest questions were caused by the proposed raising of taxes on transportation and housing.”

He continued, “In general, the bill is aimed at improving tax administration and we support this fully. We cannot, however, accept the proposed amendments to the tax on means of transportation and on housing since the government’s approach does not take into account the position of the head of state from his state-of-the-nation address in 2008, which had clearly set a task: when deliberating the Tax Code, introduce indirect taxes on luxurious articles, elite housing or expensive cars, rather than tax the middle class. That is why we believe the government-proposed amendments to the Tax Code should be done in line with such a position of the president.”

As of now, 4,000 cubic centimetres serves as athreshold between moderately taxed cars and rather heavily taxed cars. An SUV with an engine of 3,999 cubic centimetres is taxed at about 20,000 tenge ($129.56), while acar with a four-litreengine or biggercosts its owner about 150,000 tenge ($971.69) in taxes per year. The government proposals would have reduced the threshold line to 3,000 cubic centimetres and would have hiked the taxes by an order of several times.

Nigmatullin stressed that the government’s draft applied primarily to cars with engines from 3,000 to 4,000 cubic centimetres without taking into account a car’s year of production or current condition. At the same time, the draft also did not havespecific proposals to raise taxesfurther on cars with engines above 4,000 cubic centimetres in volume.

“What about cars with engines above 4,000 cubic centimetres, with 5,000 or 6,000 cubic centimetres, in other words, top class automobiles? For example, under this proposal, a 1.5 million euro Maserati with a six-litre engine will be taxed in the same amount as a 10-year-old Toyota Land Cruiser Prado with a four-litre engine?!” Nigmatullin exclaimed.

“While we support the upward revision of car taxes for cars with engines from 3,000 cubic centimetres to 4,000 cubic centimetres, we propose: for cars with engines from 4,000 to 5,000 cubic centimetres, raise the tax to 130 Monthly CalculatedIndicators, and for cars with engines above 5,000 cubic centimetres raise the tax to 200 Monthly Calculated Indicators (MCI),” Nigmatullin said. “Also, in order not to infringe on the interests of common citizens of our country, who, as a rule, own not very expensive used cars, we propose to levy newly revised taxes only on cars purchased after January1, 2014.” (One MCI, which the government uses to calculate a variety of taxes, service charges, salaries pensions etc., currently stands at 1,731 tenge ($11.21).

Nigmatullin then voiced a similar criticism of the proposed housing taxes calculations. “The (proposed three-times increase) ratio takes into account neither the quality of housing, nor the number of people living in it,” the Mazhilis Speaker told Minister Dossayev at that Nur Otan party meeting. “And this is because you did not have clear criteria for judging housing as expensive, which does not allow for taxing expensive housing with a luxury tax.”

He went on to outline the option, favoured by the members of the Mazhilis, based on a differentiated approach and on the principles of social fairness.

“Our position is abundantly clear: those who drive luxurious cars and live in elite housing should pay more taxes,” he said. “That then would be a luxury tax.”

Such words had an immediate effect. By Monday, Oct. 7, Minister Dossayev was in the Mazhilis again, presenting a revised governmental position and basically agreeing with the vision offered by Speaker Nigmatullin.

In particular, Dossayev said taxes on cars with engines smaller than 4,000 cubic centimetres would not be raised. “For existing cars with engines above 4,000 cubic centimetres the rates will remain unchanged, but (for newly purchased ones) they would go up as indicated after January 1, 2014,” he said.

At the same time, cars with engines of above 5,000 cubic centimetres will all but be called luxurious cars now and will be taxed at 200 MCIs.

Similarly, the government now proposes to triple the tax on properties worth more than 150,000,000 tenge (roughly one million dollars), essentially placing the “luxury” tag on such properties. And if a house or an apartment are worth more than that, there would be an additional 2 percent tax on the difference between the actual cost and the one-million-dollar mark.

Dossayev was clear though that the proposed amendments to the Tax Code would not introduce a notion of “luxury”, but would only quantify it.

This situation and this back-and-forth between the government and the parliament on a key issue that affects hundreds of thousands if not millions of people in Kazakhstan tells us several things.

One, society in Kazakhstan, while seeing a general growth in the living standards, has also seen, through the explosion of free enterprise, a rather fast growth in the numbers of the very rich. As it works to ensure social cohesion and build a fairer society, the government decided that it is time to make the very rich pay back more in taxes. And this is only too fair.

Two, the middle class in the country has also grown in numbers. However, in light of the revised government proposal, it seems like the government is prepared to term a middle-classperson as someone who drives a four-litre car and/or lives in somewhat expensive housing worth under one million dollars. By U.S. standards, it would sound like a very generous offer, while by European standards it would sound like a very, very generous offer. But it also means that the government, and, indeed, the ruling party in Kazakhstan are setting a rather high ceiling for now in the desire to support, rather than alienate the middle class.

It also means the government clearly supports free enterprise in Kazakhstan, and such a stance should only be lauded. Free enterprise and the ability to economically prosper has been the engine to Kazakhstan’s economic growth which has raised the standard for all Kazakhs. So, it is not a bad thing to be “rich.” However, it is reasonable to have a progressive tax system where the rich pay more.

But it is also a path that should be covered very carefully, for there is a very fine line to be drawn. Taxing the super-rich is often politically attractive, but there are simply not enough “rich” to make a major economic impact to the country’s budget. As a result, such policies could easily become taxes on the middle class, as was seen in quite a few other countries.

Last but not least, this current interaction between the government and the parliament shows a maturing kind of relationship between the two branches of power, which have to take into account increasingly critical and actively articulated public opinion. In other words, this seems like a good example of democratic practices taking stronger hold in a developing society, which can and should only be welcomed.