How to Introduce a Progressive PIT Scale the Right Way

A few words on yesterday's initiatives

However much outrage it may provoke, a progressive scale is the fairest system of taxation in the modern world. A decision has finally been made on something we have discussed many times. Now the most important thing is to implement the progressive system correctly.

For a progressive scale to work for the benefit of the economy, several things need to be taken into account:

1. The progressive scale should stimulate consumption in the country. This is achieved through deductions that reduce the tax base. Various deductions are introduced for this purpose, for example, the cost of purchasing an apartment, mortgage interest, medical expenses incurred in the country, and education expenses incurred in the country. Such deductions will encourage the consumption of domestic goods and services and increase demand.
2. The progressive rate should be calculated on a cumulative (marginal) basis. For example, if the rate is 0% up to KZT 100,000, 10% up to KZT 200,000 and 20% up to KZT 500,000, then the tax on a salary of KZT 100,000 will be zero. For KZT 200,000 it will be KZT 10,000 (100×0% + 100×10%), an effective rate of 5%. For KZT 500,000 it will be KZT 70,000 (100×0% + 100×10% + 300×20%), or 14%. If an individual has deductions, they reduce taxable income and the effective rate falls. For example, if the mortgage deduction is KZT 100,000, PIT will be KZT 50,000 (100×0% + 100×10% + 200×20%), or 10%.
3. On the whole, the tax burden across the country should not increase. Rather, income should be redistributed in favor of people with lower wages. This would also increase consumption nationwide, because higher earners tend to save, while lower earners spend money to meet their basic needs. In addition, lower earners tend to buy more domestically produced goods, as they are more sensitive to price.

Therefore, from an economic standpoint, the progressive scale should stimulate consumption in the country, which in turn supports economic growth.

The construction of social housing and a new mortgage program for purchasing it were also raised. From an economic standpoint, this project is debatable and is more of a social project. Economically, it is better to build infrastructure, which makes the same contribution to the construction sector but has a far greater multiplier effect on the economy, since good infrastructure lowers the cost of producing goods and services. Fortunately, there are plenty of infrastructure projects. For example, we could overhaul the country's entire irrigation system, which was built back in the Soviet era. Almaty Region has plenty of water and a good climate for irrigated farming, but it lacks the infrastructure for irrigation to work properly, hence low labor productivity and high production costs. Or we could speed up the construction of the Almaty metro and start building suburban railways. We could accelerate the construction of the Big Almaty Ring Road (BAKAD). Social housing could be built only in large cities, with the aim of accelerating the urbanization of major centers such as Almaty, Nur-Sultan, and Shymkent. Large agglomerations also have a multiplier effect on the economy.

Many good initiatives have been announced, and if implemented competently, they will have a positive effect on the economy. We will wait for the details, because a great deal will depend on them.