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Russia Considers Largest Tax Overhaul in 25 Years to Fund Ukraine War

Russia Considers Largest Tax Overhaul in 25 Years to Fund Ukraine War

The Kremlin is proposing significant changes to Russia’s tax system in response to the financial strain of its military operations in Ukraine. This marks the most substantial overhaul of the country’s tax policy in 25 years, targeting the wealthy with a new progressive income tax rate and increasing corporation tax.

The new tax reforms, suggested by President Vladimir Putin during his re-election campaign, come as defence spending has surged to over 8% of GDP, consuming nearly a third of the state budget. To sustain this spending, the government is shifting its focus from civilian economic welfare to military funding.

Key aspects of the proposed reforms include:

1. Progressive Income Tax Rates:
– Lowering the threshold for the higher 15% tax rate to incomes between 2.4 million and five million roubles (around £20,800 to £43,500).
– Introducing additional tax bands:
– 18% for incomes between five million and 20 million roubles (around £43,500 to £174,000).
– 20% for incomes between 20 million and 50 million roubles (around £174,000 to £434,000).
– 22% for incomes over 50 million roubles (around £434,000).

2. Increased Corporation Tax:
– Raising the rate from 20% to 25%.

These changes are projected to generate 2.6 trillion roubles (£22.5bn) in budget revenues. The government argues that these measures will address national issues, reduce inequality, and support regional development. However, some Russians are skeptical, believing the primary motive is to fund the ongoing military operation.

The proposed tax hike represents a dramatic shift from Putin’s previous tax policies. In 2001, he introduced a flat tax rate of 13%, which was widely credited with boosting revenue and his popularity by simplifying the tax system. A higher rate of 15% was added in 2021 for those earning over five million roubles, but the current proposals represent a significant departure from this approach.

Economic analysts like Alexander Kolyandr from the Centre for European Policy Analysis suggest that the reforms indicate a strategic move to prioritize military spending over civilian economic well-being, a shift from “butter” to “guns.”

While the Kremlin asserts that only 3% of the workforce will be affected and that the reforms are equitable, the public reaction in Moscow has been mixed. Many citizens express concerns about the fairness and necessity of the new taxes, fearing that the financial burden will ultimately fall on those who work hard.

As Russia’s economy continues to be heavily reliant on state spending, the sustainability of such a financial strategy is in question, and the proposed tax reforms reflect an urgent need to secure more funding to support the government’s military expenditures.