Russian President Vladimir V. Putin is about to impose rare tax increases on businesses and high earners, a move that reflects both the rising costs of his war in Ukraine and the ongoing Tight control of the Russian elite during the Fifth War. term of office.
Financial technocrats in Putin’s government are looking for new ways to finance not only Ukraine’s expensive war but also a broader confrontation with the West that is likely to remain costly for years.Russia is allocating Nearly one-third of the total 2024 budgetDefense spending has risen sharply this year, exacerbating a deficit the Kremlin has taken pains to control.
The proposed tax increases underscore Putin’s growing confidence in his political control over Russia’s elite and the resilience of Russia’s domestic economy, signaling his willingness to risk alienating parts of society to fund wars. This would be the first major tax reform in more than a decade.
“I think it really shows how comfortable he is,” said Richard Connolly, a Russia economics expert at strategic analysis firm Oxford Analytica. “The fact that they’re doing this – They hope to repair the house in good weather, or at least strengthen the walls from a financial perspective.”
Military spending and high oil prices have boosted the Russian economy and pushed up wages, despite leading to higher inflation and labor market shortages; this could lead financial officials to believe now is a good time to push for tax increases.
Those responsible for paying Russia’s bills cannot predict how much Putin’s future geopolitical moves will cost or whether Western sanctions will further constrain revenue.
“From Moscow’s perspective, they’re looking pretty good and it’s a good time to do these things,” Mr Connolly said. “Even the people who are going to be affected have had a good few years and it looks like they’re going to have a good year ahead.”
Few details are known about the planned increase. Putin said in a speech on Wednesday that his government was evaluating various proposals. He said the new tax arrangements would remain in place over the long term to ensure stability.
“Modernizing the fiscal system should ensure a more equitable distribution of tax burdens while stimulating business development and investment, including infrastructure, social and training projects,” Putin said.
Most Russians pay income tax at a flat rate of 13 percent, far lower than the rates typically paid by U.S. and Western European taxpayers. Putin said in an interview in March that he planned to introduce a new progressive tax system in part to alleviate poverty, a view common among many Russians who support increasing taxes on the country’s wealthy, who have historically been taxed lower.
A tax that largely leaves low-income earners unaffected could also help quell war resentment among poorer Russians, who provide much of the manpower for the military and bear the brunt of casualties. Putin said the tax reform would include special incentives for certain groups, which could include Russians directly involved in the war or families with three or more children.
In internal discussions, Russian officials are considering raising the personal income tax rate from 13% to 15% on annual income over 1 million rubles ($10,860) and from 13% to 15% on annual income over 5 million rubles ($54,300). 20%. According to a report by Russia’s independent investigative outlet Vital Stories, which cited unnamed government officials, the figure was 15%. Bloomberg News confirmed.
The change could have a particularly severe impact on Moscow, where residents earn some of the highest wages in the country. The average salary in Russia last year was about 884,500 rubles ($9,606), according to the national statistics agency Rosstat. In Moscow, this amount is almost double, to about 1,636,800 rubles ($17,776).
The government is also considering increasing corporate profits tax from 20% to 25%, independent news outlet Big Story reported. report. Changes in corporate taxation are seen as one of the key ways to increase the share of revenue from sources outside the oil and gas industry.
Heli Simola, senior economist at the Bank of Finland, said about a third of the Russian federal budget comes from oil and gas, meaning a sharp fall in prices in the industry could hinder Moscow’s ability to finance the war.
“They don’t think about whether the company is happy,” Ms. Simola said. “They wanted to get the money, they needed the money, and they wanted to show the companies that they had to do their part in funding the war and the common cause.”
The planned new tax policy shows that the entire Russian society, from business executives to mobilized soldiers, is drawn into the war that has become a defining principle of Russian public life.
Still, many Russians, except for high earners, would not see a significant income tax increase under the proposals being discussed, limiting a potential political backlash for Putin.
Moscow’s defense spending soared as a result of the war. The Russian government has more than tripled its defense spending compared with the year before the full-scale invasion of Ukraine. Russia’s financial technocrats are taking advantage of the current economic situation to finance future war spending.
Alexandra Prokopenko, a fellow at the Carnegie Russia and Eurasia Center, said, “No one knows Putin’s predictions about war.” “There are rumors and expectations that Russia is about to escalate the situation. They don’t have a crystal ball; they don’t have a crystal ball. That’s why they want to get the money now.”
For much of the 1990s, Russia had complex tax laws with limited enforcement, which allowed many Russians to avoid paying taxes entirely.
But in the years since Mr. Putin came to power nearly a quarter-century ago, the country has gone through a tax revolution. Implement a flat personal income tax of 13% to encourage compliance, Significant increase in income tax revenue for the country, but raises equity issues in societies with severe income inequality.
Russia technically eliminated the flat tax in 2021, requiring residents earning more than 5 million rubles a year to pay 15% instead of 13%.Report from Russian business newspaper “RBK” established The vast majority of excess revenue from the increase comes from Moscow.
Since Putin launched his invasion in early 2022, Russian finance officials have found creative ways to raise more money to finance the war, in addition to running deficits.
Russia changed The way it calculated taxes on oil companies last year to fill government coffers.it taxes quit Leaving Russia and importing it by foreign companies new export tariffs Commodities such as oil, lumber and machinery.Mr Putin will “Windfall” tax About corporate excess profits.
Many businesses in Russia are happy to pay higher corporate tax rates as long as unexpected windfall taxes and payments end, but that’s not guaranteed.
“You now increase corporate taxes and then say you will try to reject windfall taxes, but if the war continues, these things are likely to continue,” said Mr. Connolly, who predicted that increases in Russian defense spending would lead to long-term holdouts.
Russian authorities, which initially used more oil and gas-related revenue to fund the war, will now pursue all corporate profits, said Prokopenko, a former central bank official.
“They need to do what’s called revenue mobilization,” she said. “Increasing taxes is part of it.”
Oleg Matznev and Alina Lobzina Reporting from Berlin.
