Death and Taxes: Little Else is now Certain in Putin’s Russia

EUToday CorrespondentsApril 28, 20240132 views

President Vladimir Putin of Russia is on the verge of implementing a rare tax hike targeting corporations and high-income individuals.

The move is a response to the escalating costs of the ongoing conflict in Ukraine and highlights Putin’s firm grip on power over the Russian elite as he begins his fifth term in office, the New York Times reports.

Financial experts within Putin’s administration are exploring new avenues to finance not only the war but also a broader geopolitical confrontation with the West, which is expected to entail substantial expenses for years to come.

With nearly a third of Russia’s 2024 budget allocated to defence spending, the significant increase in expenditure is contributing to a deficit that the Kremlin has been keen to manage.

The proposed tax hike reflects Putin’s growing confidence in his political control over the elite and the country’s economic stability.

It indicates his readiness to risk displeasure from certain segments of society to finance the war effort.

This potential tax increase would mark the first major overhaul in over a decade, signaling a proactive approach to reinforce fiscal measures while economic conditions remain favourable, buoyed by robust military spending and high oil prices.

Uncertainty looms regarding the future financial implications of Putin’s geopolitical maneuvers and the potential impact of ongoing Western sanctions on Russia’s revenue streams.

Nevertheless, Moscow appears confident in its current economic standing and clearly views this as an opportune time to implement tax adjustments.

Details about the proposed tax changes remain sparse.

Putin indicated in a recent speech that his government is evaluating various proposals aimed at ensuring long-term stability in tax arrangements.

The overarching goal is to modernise the fiscal system to achieve a fairer distribution of the tax burden while incentivising business development and investment in essential sectors like infrastructure, social services, and education.

Currently, most Russians are subject to a flat income tax rate of 13 percent, significantly lower than those in the United States and Western Europe.

Putin has hinted at introducing a progressive tax scale to address poverty concerns, a move supported by many Russians favouring higher taxes on the wealthy.

A progressive tax structure, potentially sparing lower-income earners, could help alleviate discontent among poorer Russians affected by the war’s consequences.

Putin has suggested that the tax overhaul might include special incentives for specific groups, such as those directly involved in the war effort or families with multiple children.

Internal discussions have revolved around increasing personal income tax rates for higher earners, with proposals to raise the tax rate for earnings over a certain threshold.

Additionally, the possibility of raising corporate profit tax rates as a means to diversify revenue sources beyond the oil and gas sector, which currently contributes significantly to the federal budget, is reportedly being considered.

The Russian government’s heavy reliance on oil and gas revenues underscores the importance of broadening its revenue base to mitigate risks associated with potential fluctuations in energy prices.

The proposed tax adjustments reflect a broader societal mobilisation in support of the war effort, positioning it as a central aspect of Russian public life.

While the planned tax changes may impact high earners, many ordinary Russians are unlikely to see significant increases in their tax burdens, thus minimising potential political backlash against Putin.

Moscow’s defence spending has surged since the onset of the conflict in Ukraine, prompting the government to seek additional funding avenues for future military expenditures.

Despite uncertainties surrounding the duration and costs of the war, the Russian government is taking proactive measures to shore up financial resources.

Over the years, Russia has undergone significant tax reforms aimed at enhancing compliance and revenue collection, transitioning from a complex tax code to a simplified flat tax system.

Recent adjustments in tax policies, including targeted measures on oil companies and windfall taxes, reflect the government’s efforts to maximise revenue streams while maintaining fiscal stability amidst geopolitical challenges.

As Russia continues to navigate the complexities of its economic landscape, tax policy remains a critical tool in funding its strategic objectives and sustaining its position on the global stage.