Russia Weighs Post-Election Tax Hikes to Fund War in Ukraine

(Bloomberg) -- Russia is weighing options for big tax increases to raise as much as 4 trillion rubles ($44 billion) as the war in Ukraine puts growing pressure on the government’s coffers.

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Tax hikes on corporate profits and on high-earning individuals are being considered, two people involved in the discussions said, asking not to be identified because the matter isn’t public. The government may raise personal income tax to 20% from 15% now for those earning more than 5 million rubles, and company taxation to 25% from 20%, according to the “Important Stories” news site and confirmed by two people involved in the discussions.

Russia’s Finance Ministry didn’t immediately respond to a request to comment.

President Vladimir Putin has announced he intends to overhaul the tax system once he returns for a new six-year term in this week’s elections. In a Feb. 29 speech to lawmakers and officials at Russia’s Federal Assembly, he said he wanted “a more equitable distribution of the tax burden toward those with higher personal and corporate incomes.”

Individuals in Russia pay 13% tax on annual incomes up to 5 million rubles, rising to 15% for anything over that level. Changes under consideration would lower the 15% threshold to 1 million rubles and increase the level to 20% on incomes above 5 million rubles, shifting many more Russians out of the lowest tax bracket.

The average annual salary in Russia in 2023 was 884,508 rubles, according to Federal Statistic Service data.

The war is helping to fuel a wage spiral as recruitment into the military intensifies an acute shortage of workers in the economy. Compensation for specialists such as engineers, mechanics, machine operators, welders, drivers and couriers rose by 8%-20% last year, according to data from local recruitment service Superjob seen by Bloomberg.

Officials are likely to decide on the exact levels of the tax increase in the summer, the people said.

What Bloomberg Economics Says...

“Higher taxes on high-income households will help solve three problems for Putin. First, they will generate between 0.5% and 1% GDP of public revenue, that will help fund his war in Ukraine. Second, they will reduce capital outflow and thus reduce pressure on Russia’s currency. Third, a more progressive tax schedule will fund Russia’s expanding child-benefit programs, which are trying to reverse its demographic decline.”

-Alexander Isakov, Russia economist

The government considers the beginning of a new presidential term a window of opportunity for unpopular reforms, according to people involved in the discussions. Shortly after he was last reelected in 2018, Putin pushed through an unpopular increase in Russia’s pension age and raised the Value Added Tax to 20% from 18%.

Russia’s government is draining its resources amid surging expenditure on the military and efforts to support businesses as the economy labors under the pressure of unprecedented international sanctions. Finance Ministry data showed it had tapped almost half of the national wealth fund’s available reserves at the end of last year.

This year’s federal budget was 1.5 trillion rubles in the red by the end of February, while the Finance Ministry has planned for a deficit of 1.6 trillion rubles for the whole of 2024.

(Updates with wage spiral in the seventh paragraph. An earlier version of this story corrected the figure for average annual salary in the sixth paragraph.)

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