The current financial strain on the Russian government, due to the ongoing war in Ukraine, has prompted considerations for a significant overhaul of the tax system. Amid discussions for what would be the most substantial tax reform in nearly a quarter of a century, the government is exploring the implementation of a progressive income tax rate targeting the wealthy, along with a proposed increase in corporation tax.
The urgency for this reform stems from the fact that defence spending has exceeded 8% of GDP, consuming nearly a third of the state budget this year. In response to this financial strain, President Vladimir Putin has recommended these tax reforms in order to generate additional budget revenues. These proposed reforms represent a departure from his previous tax policies, particularly the introduction of a flat rate of just 13% in 2001, which has been in effect for most Russians since then.
The proposed changes include the establishment of a new progressive income tax rate, with different tax brackets based on income levels. Incomes ranging from 2.4 million to five million roubles would be taxed at 15%, while those between five and 20 million roubles would face an 18% tax. Incomes falling between 20-50 million roubles would be taxed at a 20% rate, and earnings over 50 million roubles would be subject to a 22% tax. Additionally, corporation tax is expected to increase from 20% to 25%.
If approved, these changes are projected to generate approximately 2.6 trillion roubles (£22.5bn) in budget revenues. The government asserts that only 3% of the workforce will be affected by the proposed alterations and argues that the reforms are equitable, aiming to address national issues, reduce inequality, and foster the development of Russia’s regions. These assertions, however, have been met with scepticism among the populace, with many expressing concerns about the potential impact on their finances.
Despite the government’s assertion that the changes are necessary and fair, residents remain wary of the potential financial implications, especially in light of the ongoing war in Ukraine. It is evident that these proposed tax reforms represent a significant development for Russia, reflecting a recalibration of economic priorities as the country continues its military operations.