The hidden reasons behind Russia’s mega tax rises

Last month Russia’s finance ministry officially unveiled plans for the country’s biggest tax “reform” in over 20 years. The changes will mean higher taxes for business and Russia’s middle class. The Bell spoke to economist Oleg Buklemishev, a former head of the finance ministry’s department of international finance, about the hidden reasons why Moscow has decided to hike taxes and how, despite the official narrative, it will not promote “social justice” or “fairness.”

• The tax changes reflect a wholesale change in Russia’s philosophy when it comes to fiscal policy, said Buklemishev. For the last 20 years, the financial orthodoxy and core ideology was that Russia saved in the good years and then spent what it accumulated during rainy days or on grand investment projects. But this approach no longer holds up, because it is impossible to rely on being able to quickly raise funds to cover shortfalls without access to the Western financial market and convertible currencies. That means Russia can only fund planned new expenses by raising taxes. 
• Buklemishev is skeptical of whether the Chinese yuan, which has become a vital part of the Russian financial system since the invasion of Ukraine, can fill the gap. “First, this is not a convertible currency. Second, it's hard work placing yuan in liquid instruments that generate normal returns. Third, we don’t know what will happen with the yuan as a currency over any longer-term perspective, because it is managed slightly differently from any other currency in which we have invested,” he said.
• The authorities have made much play of how the higher taxes on wealthy earners and corporates will allow Moscow to fund new investments and boost social equality. But this talk about “social justice” and “fairness” is largely hot air, Buklemishev said. “If they really wanted to use taxes to fight injustice, they would need to introduce a greater tax-free threshold for low earners or a steeper tax scale ... It is stupid to ‘help’ the poor with taxes. The rich can be taxed.”
• Moreover, this could be just the beginning. Buklemishev expects further tax rises as and when the authorities need the money. However, he noted that under the current reforms, tax thresholds are not indexed to rise with inflation, meaning that the level at which higher rates kicks in will fall in real terms every year. That concept, known as “fiscal drag,” will give the finance ministry some leeway to scoop up more revenue without formally raising taxes.

Why the world should care

One of the merits of Vladimir Putin’s early days as president was the establishment of a flat 13% tax rate. It helped to wipe out traditional cash-in-hand payments and other tax avoidance wheezes that had proliferated in the 1990s. But the flat scale could not last forever, given the war in Ukraine and the prioritization of military spending. While hiding behind slogans of “social justice” to placate the masses, the authorities have to find new ways to fund the war.