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RIA Novosti
June 27, 2005
Russian parliament abolishes inheritance tax

MOSCOW (RIA Novosti political analyst Yuri Filippov).

President Vladimir Putin will in the next few days sign off on a law newly approved by both chambers of parliament that does away with inheritance tax, as well as canceling payment of gift tax by close relatives and spouses.

Other transactions will remain subject to real-estate, vehicle, stock, equity and participatory interest gift tax of 13%, the same as Russia's unified income tax rate.

The law, due to come into force on January 1, 2006, was drafted by the government with record speed after Putin stated in his April state of the nation address that he thought that it would be a good decision to abolish the inheritance tax.

"Billion-dollar fortunes are all hidden in off-shore zones anyway and do not form part of people's inheritance [in Russia]," he said. "Meanwhile, people have to pay sums they often cannot even afford here just for some little garden shack."

The president's assessment was pretty accurate. Inheritance tax currently stands at 5% and 40%, depending on the cost of property and the degree of kinship. Meanwhile, in the decade and a half since the beginning of the market reforms, tens of millions of Russians have gained ownership of apartments, country cottages (dachas) and land plots, with the property they received in Soviet times becoming their legal property either for free or for a token sum much less than the average monthly pay in the country.

However, even now their children have to fork over a lot of money in taxes just to take possession of the property their parents received for free. As Putin said, far from everybody can afford this. As a result, the nascent Russian middle class - who generally support Putin and centrist political forces such as the United Russia party - not only incurs losses, but also remains relatively small.

The law abolishing inheritance and gift taxes received broad backing in the State Duma, the Russian parliament's lower house, gathering 414 out of 450 possible votes - a record.

Only a small group of communist deputies objected to the document. Communist Oleg Smolin said that the draft law serves the interests of "oligarchs," or super-rich Russian owners who received production equipment, factories and plants worth billions of dollars - but not apartments or dachas - during the privatization of the 1990s. They bought them not only at a token price but also in some cases by flagrantly violating the law.

"Ordinary citizens will gain hundreds, thousands of rubles at best, whereas oligarchs [will get] millions and billions of dollars," Smolin said.

However, the Russian middle and aspiring middle classes generally disagree. Although they do not deny that major property owners will benefit hugely, they tend to agree more with lawyer Andrei Makarov, a United Russia Duma deputy, who says that the abolition of inheritance tax is in the interests of tens of millions of Russians.

"A poor granny who wants to give her grandson a plot of land attached to her dacha cannot do this because she has no money to pay the tax," Makarov said.

According to the Finance Ministry, the treasury will not suffer as a result of inheritance tax being abolished. In 2004, budget revenues from this tax amounted to a mere 921 million rubles, or about $32 million at current exchange rates. This is not the millions or billions of dollars in budget losses that Smolin talks about.

In addition, most of the younger oligarchs will inherit their property in more than 30 years. The government has not ruled out that the abolition of the inheritance and gift taxes is a temporary measure introduced for a 10-15 year transition period in order to bring the process of mass privatization launched 15 years ago to a logical and painless end for the society it was supposed to benefit.

Even the government, which drafted the law on the abolition of the inheritance tax, has admitted that this tax exists with positive results in most developed countries. However, in Russia, where the rich do not pay taxes because they do not want to, and the poor because they cannot, the inheritance tax, far from providing a stimulus to national development, acts as a brake on it.