Putin’s war will soon reach Russians’ taxes

Russian President Vladimir V. Putin appears to be on track to implement an unprecedented tax increase on corporations and high earners. This is a move that reflects both the rising costs of the war in Ukraine and Putin’s tight control over Russia’s elites. 5th term in office.

Putin’s financial technocrats are looking for new ways to finance not only a costly war in Ukraine but also a broader conflict with the West that will continue to be costly for years. .Russia is allocating Nearly a third of the entire 2024 budgetDefense spending has increased significantly this year, further increasing the deficit that the Kremlin has struggled to contain.

The proposed tax increase underscores Putin’s growing confidence in his political control over Russia’s elites and domestic economic resilience, and his willingness to risk alienating sections of society to finance the war. It shows that. This is the first major tax reform in more than a decade.

“I think this is a real indication of how comfortable he is,” said Richard Connolly, an expert on the Russian economy at strategic analysis firm Oxford Analytica. “The fact that they’re doing it means they’re looking at repairing the house while the weather is nice, or at least reinforcing the walls from a financial standpoint.”

Military spending and soaring oil prices are fueling Russia’s economy and pushing up wages, even as they cause high inflation and labor market shortages. So perhaps Treasury officials see now as an opportunity to push through with 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 revenue.

“From Moscow’s perspective, Russia looks to be in pretty good shape and now is a good time to do this,” Connolly said. “Those affected by this turmoil have had a fulfilling life over the past few years, and it looks like it will be a good year ahead.”

Few details are known about the planned increase. In a speech on Wednesday, Putin said the government was evaluating various proposals. He said the new tax measures would remain fixed for a long time to ensure stability.

“Modernization of the fiscal system should ensure a more fair distribution of the tax burden and at the same time stimulate companies to develop and invest in infrastructure, social and training projects, etc.,” Putin said.

Most Russians pay a flat 13% income tax, which is 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 new progressive tax rates as part of poverty alleviation, which would support raising taxes on the wealthy in countries with historically low taxes. It’s a popular message among many Russians.

Taxes, which greatly reduce the burden on low-income people, could also help ease dissatisfaction with the war among poorer Russians, who provide much of the manpower for the military and bear the brunt of the casualties. Putin suggested that tax reform could include special preferential treatment for certain groups, such as Russians directly involved in the war effort and families with three or more children.

In an internal consultation, Russian authorities have raised personal income tax from 13% to 15% on incomes exceeding 1 million rubles (about $10,860) a year, and increased the tax rate on incomes above 5 million rubles (about $54,300) a year. We are considering raising it to 20%. A report by Russia’s independent research agency “Storytelling that Matters”, citing anonymous government officials, put the number at 15%. Confirmed by Bloomberg News.

The changes are likely to hit Moscow particularly hard, where residents earn some of the highest salaries in the country. The average salary for Russians last year was about 884,500 rubles ($9,606), according to the national statistics agency Rosstat. In Moscow, it was almost double, or about 1,636,800 rubles (about $17,776).

The government is also considering raising the tax rate on corporate profits from 20% to 25%, independent news outlet Important Stories reported. report. Changes to corporate taxation are considered one of the key ways to increase the share of revenue from sources other than the oil and gas sector.

Heli Simola, a senior economist at the Bank of Finland, said around a third of Russia’s federal budget comes from oil and gas, and a significant drop in prices for the industry could hamper the Russian government’s ability to finance the war. He said that there is a possibility that

“They don’t care about whether the company is happy or not,” Simola said. “They want to get the money, and they need it, and they want to show businesses that they have to do their part to fund the war and the common cause.”

The planned new tax system shows how the entire Russian society, from business owners to mobilized soldiers, is being drawn into the war effort, making it a defining principle of Russian national life. It has become.

Still, with the exception of high-income earners, many Russians would not pay significantly more income tax under the proposals being discussed, limiting any potential political backlash against Mr. Putin.

Moscow’s defense spending skyrocketed due to the war. Compared to the year before the full-scale invasion of Ukraine, the Russian government’s defense spending has more than tripled. Russian financial technocrats are taking advantage of the current economic situation to raise money for future war costs.

Alexandra Prokopenko, a fellow at the Carnegie Russia and Eurasia Center, said that “no one knows what President Putin is predicting” about war. “There are rumors and predictions about future escalation by Russia. They don’t have a crystal ball. That’s why they want to get this money now.”

For much of the 1990s, Russia operated under complex tax laws with limited enforcement, allowing many Russians to avoid paying taxes altogether.

But in the years since Mr. Putin took power nearly a quarter of a century ago, the country has undergone a tax revolution. His introduction of a 13% flat tax on personal income encouraged compliance and significantly increased state income tax revenues, but raised questions about fairness in a society with significant income inequality.

Russia effectively left the flat tax in 2021, making residents with an annual income of more than 5 million rubles pay 15% instead of 13%.Report from Russian economic newspaper RBK found The excess revenue from this increase has come overwhelmingly from Moscow.

Since Mr. Putin launched his invasion in early 2022, Russian finance officials have not only run deficits but also found creative ways to raise more money for the war.

Russia changed This is how to calculate the taxes imposed on oil companies last year to fill government coffers. taxing the withdrawal of foreign companies withdrawing from Russia; new export duties Products such as oil, wood, and machinery.And Mr. Putin “Windfall” tax About corporate excess profits.

Many companies in Russia are willing to pay higher corporate tax rates as long as they avoid unexpected taxes and payments, but that is not guaranteed.

“We say we’re going to do our best to raise corporate taxes now and deny windfall taxes, but if the war continues, this situation is likely to continue,” Connolly said, adding that Russia’s increased defense spending would , lasts longer.

Ms Prokopenko, a former official at Russia’s central bank, said Russian authorities had initially increased oil and gas revenues to fund the war, but would now go after all corporate profits.

“They need to do what’s called income mobilization,” she says. “And raising taxes is part of that.”

Oleg Matznev and Alina Lobzina I contributed a report from Berlin.

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