The Putin redistribution


Introduction


Should the Russian government make taxpayers pay more to finance health care and education, after Putin’s re-election?


The increase

President Vladimir Putin ordered the government to analyze the possibility of increasing expenditures after the March election. By 2024, expenditures on education shall increase by 0.8% of GDP, and on health care by 0.7% of GDP, compared with 2017.

The government may also increase taxes. The personal income tax may be increased to 15%, reports RBC.ru.

Currently, Russia has a flat tax rate of 13%, reports Heritage Foundation. According to the 2017 budget, Russia was to spend 549 billion roubles (3.3% of all expenditures) on education and 363 billion roubles (2.2% of all expenditures) on health care, reports Zakony RF 2017, a website on Russian legislature. This is 0.62% and 0.41% of Russia’s projected 2017 GDP, according to the IMF World Economic Outlook Database.


Effects of increasing taxes on output and productivity

A tax increase, ceteris paribus, decreases disposable income, which is available for consumption, decreasing aggregate demand and lowering output and employment. Also, individuals are less willing to invest and start businesses, since a higher portion of their income is taxed.

An increase in expenditures, financed by an equal tax increase, can stabilize the economy during recession. The government withdraws money that taxpayers may place “under a pillow”, and spends it on services, creating new jobs. From 2013 till mid-November 2016 alone, the Central Bank had withdrawn licenses from 291 second-tier banks, reports Rambler. Fearing losses and lacking investment opportunities under the underdeveloped stock market of Russia, large depositors, with incompletely insured savings, may choose not to invest. However, the recession has slowed down already. The IMF projects real GDP growth of 1.8%, as of 2017, compared with declines in 2015 and 2016 (-2.83% and -0.22%, correspondingly). Stabilization would have been more desirable earlier.

Increasing taxes decreases the incentive to work, particularly of secondary workers. Since more income is taxed, employees work fewer hours. The member of the family who earns most of its income, called the primary worker (usually the husband), generally continues working much as usual: his labor supply is income inelastic. The secondary worker who earns the rest (usually the wife) may work less or drop out of the workforce, having an elastic labor supply. However, most medical personnel and teachers in Russia are women, who may benefit from possibly higher salaries. Yet these professions are generally low-paid in Russia, and are likely to remain so even with the increases. The new tax encourages many women from many other professions to work less or stay at home, consistent with Russia’s traditionalist policy.


Externalities of education and health care

Some services have positive externalities that justify government financing. Positive externalities are benefits to non-users. For example, education benefits society by fostering a sense of community, contributing to stability, and increasing political awareness and participation in the political process.

State education has drawbacks. Its opponents fear that state schools and universities may provide biased classes, teaching only theories consistent with government policy. Anti-western propaganda makes this issue pungent, though Russian private schools may also provide biased curricula, fearing penalties for not doing so. However, under the threat of bankruptcy, private schools may provide better education than public schools do.

Though public schools are usually free, the benefits of free schools are questionable. (Article 43 of the Russian constitution guarantees free school education, though complaints about various unofficial payments are frequent.) The cost of educating each additional student is above zero (though it can be small in an uncongested educational institution), and this justifies fees. Also, providing free education to everyone is inequitable: the rich benefit, not just the poor.

A study of 476,980 records of 15-year-old students, from 18,029 schools in 72 countries and sub-national units, based on the 2009 Program for International Student Assessment (PISA), showed that in many countries, including Russia, private schools are inferior to public schools. In countries where public schools provide only the basic education, private schools attract the best students. However, if public schools reward the best students, private schools have only the worst to attract.

The few students of expensive Russian private schools are poorly educated. Average fees in Russia are about as high as in the United Kingdom and 20% higher than in the United States. Russian private school students scored worse than most European students (except students in Norway, Latvia, Luxembourg, the Netherlands, and Italy).

This may explain why few students study in private schools in Russia. As of 2009, there were only 213 private schools in Russia (0.23% of all schools), where about 5,000 students studied, reports Interfax. The number of private schools increased to 700, with 45,000 students, or 5% of all students of Russian schools in 2015, reports the Komsomolskaya Pravda. One may argue, however, that poor quality of education in Russian private school justifies not spending more on state schools, but reforming education to provide fewer costly classes in public schools that students may not need in adult life, to help attract better students to private schools.

Health care also has positive and negative externalities. Health care improvements increase technological capacity of society. Vaccines not only protect the vaccinated, but also reduce the likelihood of others catching infections. Yet health care also produces chemical waste. Also, new medicines can increase resistance of bacteria to antibiotics. Public hospitals and clinics are free or more affordable, but private ones may provide more timely and sophisticated care. Doctors and other personnel of private clinics may earn higher incomes.

A review of studies of health care in low- and middle-income countries, conducted from January 1, 1980 till August 31, 2011, was used to compare private and state clinics. A country was considered low or middle-income if its 2012 GDP per capita did not exceed $12,275. There were 34 studies in South Asia, East Asia and the Pacific, 32 studies in Sub-Saharan Africa, 13 studies in Latin America, 6 studies elsewhere, and 17 studies on multiple continents and studies that were not context-specific. The review showed that the private sector in low and middle-income countries is usually no more efficient, accountable or medically effective than the state sector. Private clinics and hospitals have vested interests for unnecessary treatment, rely on expensive medicines, lack published data for performance evaluation, and are weakly regulated. Yet state-owned clinics are less responsive to patient’s needs and lack supplies, report P. Sanjay Basu, Jason Andrews, Sandeep Kishore, Rajesh Panjabi, and David Stuckler, on PLOS medicine, a peer-reviewed medical journal. The increase in health care expenditures in Russia may be a mixed blessing.


Political factors

Soviet nostalgia in Russia makes income redistribution popular. Pavel Grudinin, the presidential candidate from the Communist Party of the Russian Federation (CPRF) and the Russian Left in general, had promised a progressive tax and an increase in social expenditures, if elected. Putin’s plan may take away Grudinin’s votes.

Some pro-western voters may support these increases, since governments spend more on education and health care in many western countries. For example, the government of Germany spent 5% of its GDP on education and 8.7% of GDP on health care in 2014, reports the World Bank. However, the top personal income tax rate in Germany is 45%, reports the Heritage Foundation. Germany and other western countries can afford such high taxes, because overall business and investment freedom there is high, due to protection of property rights, independent courts, etc. Redistribution, though popular among many voters, discourages investment and may erode support for Putin among the rich.


Conclusion

The planned increase in government expenditures and taxes is a two-edged sword. Though positive externalities on education and health care may justify spending, the redistribution may decrease output and productivity. Its main motives are political.


References

Basu, S. Andrews, J. Kishore, S. Panjabi, R. Stuckler, D. Comparative performance of private and public healthcare systems in low and middle-income countries: A systematic review. PLoS Med. 9(6). https://www.ncbi.nlm.nih.gov/pmc/articles/PMC3378609/pdf/pmed.1001244.pdf. 2012.

Constitution of the Russian Federation. Article 43 of the Constitution of the RF. http://constrf.ru/razdel-1/glava-2/st-43-krf. 2017.

Heritage Foundation. Russia. 2017 Index of Economic Freedom. https://www.heritage.org/index/country/russia. 2017.

Interfax. Russian private schools are among the worst in the world. http://www.interfax.ru/business/318367. 2013.

International Monetary Fund. October 2017 World Economic Outlook Database. https://www.imf.org/external/pubs/ft/weo/2017/02/weodata/index.aspx. 2012.

Komsomolskaya Pravda. Secondary schools in Moscow: private or state. https://www.kp.ru/guide/srednie-shkoly-moskvy.html. 2015.

Rambler. Nabiullina: Over three years, the Central Bank withdrew licenses from almost 300 banks. https://news.rambler.ru/economics/35265205-nabiullina-za-tri-goda-tsb-otozval-litsenzii-u-pochti-300-bankov/. 2016.

RBC. “Vedomosti” reported about Putin’s maneuver after the election. https://www.rbc.ru/economics/15/01/2018/5a5c119e9a7947136c47a7de. 2018.

The World Bank. Government expenditure on education, total (% of GDP). https://data.worldbank.org/indicator/SE.XPD.TOTL.GD.ZS.

The World Bank. Health expenditure, public (% of GDP). https://data.worldbank.org/indicator/SH.XPD.PUBL.ZS. 2014.

Zakony RF 2017. Russian budget for 2017 in numbers. http://zakony2017.ru/byudzhet-rossii-na-2017-god-v-cifrax.