President Vladimir V. Putin of Russia appears to be moving ahead with a rare tax hike on corporations and high earners, a move that reflects both the growing costs of the war in Ukraine and his firm grip on Russia’s elite as he embarks on a fight for a fifth term in office.
Financial technocrats in Putin’s government are looking for new ways to finance not just the war but a broader confrontation with the West that is likely to remain costly for years. Russia is allocating nearly a third of the total 2024 budgetAs for defense spending this year, there was a big increase, adding to a deficit that the Kremlin has struggled to control.
The tax hike proposal underscores Mr. Putin’s growing confidence in his political control over Russia’s elite and his country’s economic resilience at home, suggesting that he is willing to risk risk alienating sections of society to finance war. It would represent the first major tax reform in more than a decade.
“I think this is a real indication of how comfortable he feels,” said Richard Connolly, an expert on the Russian economy at Oxford Analytica, a strategic analysis firm. “The reality is they’re doing it – they’re looking to repair the house while the weather is good, or at least strengthen the walls from a financial standpoint.”
Military spending and high oil prices have boosted the Russian economy and boosted wages, despite causing higher inflation and shortages in the labor market; That probably makes finance officials see now as a good time to push for tax increases.
Those responsible for paying Russia’s bills cannot predict how much Mr. Putin’s future geopolitical moves will cost or whether Western sanctions will further limit income. or not.
“From Moscow’s point of view, they are in pretty good form and now is a good time to do these things,” Mr. Connolly said. “Even the guys who are going to be in this situation have had a few good years and it looks like they have a good year ahead.”
There are few details about the planned price increase. In his speech Wednesday, Putin said his government was evaluating various proposals. He said the new tax arrangements would be fixed for the long term to ensure stability.
“Modernization of the financial system must ensure a more equitable distribution of the tax burden, while stimulating businesses to develop and invest, including in infrastructure projects,” Mr. Putin said. , society and training”.
Most Russians pay income tax at a flat rate of 13%, significantly lower than what taxpayers in the United States and Western Europe typically pay. In an interview in March, Putin said he planned to introduce a new progressive tax scale partly aimed at reducing poverty, a message popular among many Russians who favor raising taxes on the country’s rich. , which is at a historically low level.
A tax largely on lower income earners could also help assuage discontent about the war among poorer Russians, who are providing the bulk of the military’s manpower and bearing the brunt casualties. Mr. Putin has signaled that the tax reform will include special incentives for certain groups, which could include Russians directly involved in the war effort or families with three or more children. go up.
In internal discussions, Russian officials have considered raising personal income taxes on those with income over one million rubles ($10,860) a year to 15% from 13% and increasing the tax rate. for those with income above 5 million rubles a year ($54,300) to 20%. 15 percent, according to a report by Russia’s independent investigative agency Critical Stories, which cited unnamed government officials and confirmed by Bloomberg News.
This change is likely to hit Moscow especially hard, where people have some of the highest salaries in the country. According to state statistics agency Rosstat, the average salary of Russians last year was about 884,500 rubles ($9,606). In Moscow, it’s almost double, or about 1,636,800 rubles ($17,776).
The government is also considering increasing corporate profit tax from 20% to 25%, Important Stories, an independent news outlet, reported. The change in corporate tax is considered one of the important ways to increase the proportion of revenue from sources other than the oil and gas sector.
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 significant drop in oil and gas prices could hinder its ability to finance the crisis. Moscow’s war.
“They don’t think about whether the companies are satisfied or not,” Ms. Simola said. “They wanted the money and they needed it, and they wanted to show companies that they had to help fund the war and the common cause.”
The newly planned tax policies show that the entire Russian society, from business executives to deployed soldiers, is being drawn into the war effort, which has become a defining principle of the Russian public life.
However, aside from high-income earners, many Russians would not have to pay significantly more income tax under the proposals being discussed, aimed at limiting possible political backlash against the Mr. Putin.
Moscow’s defense spending has skyrocketed due to the war. Compared with a year before the full-scale invasion of Ukraine, Russian government spending on defense has more than tripled. Russia’s financial technocrats are taking advantage of the current economic moment to raise funds for future war spending.
“No one knows Putin’s predictions” about the war, said Alexandra Prokopenko, a fellow at Carnegie Russia’s Eurasia Center. “There are rumors and predictions about Russia’s upcoming escalation. They don’t have a crystal ball; That’s why they want this money now.”
For much of the 1990s, Russia operated under a complex tax law with limited enforcement, allowing many Russians to avoid paying taxes altogether.
But in the years after Putin came to power nearly a quarter of a century ago, the country went through a tax revolution. The imposition of a flat tax rate of 13% on personal income encouraged compliance, Revenue from income tax increased sharply for the state but raises questions about fairness in a society with significant income inequality.
Technically, Russia moved away from the flat tax in 2021, requiring residents earning over 5 million rubles a year to pay 15% instead of 13%. A report in the Russian business newspaper RBK establish that the excess revenue derived from this increase came mainly from Moscow.
In addition to the budget deficit, Russian finance officials have also found creative ways to raise more money to fund the war since Putin launched the invasion in early 2022.
Russia changed how they levied taxes on oil companies last year to fill government coffers. It’s taxing exit by foreign companies leaving Russia and introducing new export tax for goods such as oil, timber and machinery. And Mr. Putin placed it “God-given” tax about the company’s excess profits.
Many businesses in Russia are willing to pay higher corporate tax rates as long as the taxes and windfall payments end, but that is not guaranteed.
“You raise corporate taxes now, then say you will do your best to turn down windfall taxes, but then,” said Mr. Connolly, who predicted higher Russian defense spending. If the war continues, these things will probably continue.” last for a long time.
Ms. Prokopenko, a former Russian central bank official, said Russian authorities, which had initially tapped into more oil-related revenue to fund the war, would now go after all corporate profits.
“They need to do what’s called income mobilization,” she said. “And raising taxes is part of this.”
Oleg Matsnev And Alina Lobzina Contributing reports from Berlin.
