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By Brendan Cole
Senior Reporter
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Russia is planning the biggest overhaul of its tax system in two decades in measures that would allow President Vladimir Putin to increase military spending in a turbulent economy hit by sanctions, inflation and the cost of the war he started.
The Russian Finance Ministry said it wants to tax the wealthy and companies more with radical plans to replace the current flat rate of 13 percent with a progressive system.
In 2020, taxes of 15 percent for earnings over 5 million rubles ($55,300) per year were introduced but the proposed measures would see this rate for income between 2.4 million and 5 million rubles. The progressive scale would reach 22 percent for earnings per year over 50 million rubles ($558,000).
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Finance Minister Anton Siluanov told a parliamentary committee that the changes "do not affect most citizens, only those with high incomes," or about 3.2 percent of Russians, business newspaper RBC reported.
Independent Russian news outlet The Bell said with no plan to index these thresholds, those facing higher tax bills will increase even if real incomes remain the same, "never mind if they continue to rise by 8 percent a year as at present."
"Current tax increases affect mostly the middle class, which is good for the regime," Russian opposition politician Aleksei Miniailo told Newsweek, adding that the changes will "squeeze more money from the citizens."
"This increase in taxation is a direct consequence of the regime running out of money and they are looking for new ways to sponsor the war," said Miniailo, co-founder of Chronicles, which conducts independent polling in Russia.
"They are careful not to hit their key categories in the population, which are the poor, the bureaucracy and the very rich. This increase in taxation is not good news at all because it will provide more money for the war."
Boris Grozovski, an expert on the Russian economy from the Wilson Center think tank in Washington, D.C., told Newsweek that, although increase affects only 3 percent of people nationwide, in Moscow the share is 15 percent; in St. Petersburg, 8 percent; while in oil-producing regions, between 5 and 10 percent.
"In the coming years, the progressive scale is expected to lead to 30 to 35 percent as the highest rates," Grozovski said. "It is unlikely that the government will raise the thresholds for increasing the tax rate in line with inflation, so more and more people will pay the tax at higher rates.
"The Kremlin wants to keep war spending at the very high level of almost 40 percent of the total budget and increase other spending, as Putin promised during the 2024 elections," Grozovski added. "This move will solve most of the budget problems and allow the government to continue increasing war spending."
The biggest revenue generator would be a corporate income tax rise to 25 percent from 20 percent and there would be new mineral extraction taxes. Reuters reported that this would bring in an additional 2.6 trillion rubles ($29 billion) in 2025, a 3.6 percent increase in budget revenues and 17 trillion rubles ($189 billion) by 2030.
The agency said the tax changes would cover Putin's 11.5 trillion rubles ($128 billion) infrastructure and social spending pledges for his new six-year presidential term without needing to rework Russia's budget rule.
But The Bell reported that increasing corporate income tax will reduce company profits by an average of 6.3 percent, even if there are tax breaks for investments in science and Russian technologies that apply only to a small number of companies.
"The trade and service sector—the bulk of medium-sized business in Russia, is unlikely to benefit," the outlet said.
Meanwhile, income on deposits, dividends and the sale of securities will be taxed at just 13 percent to 15 percent, helping those with investments more than those on salaries.
Newsweek has contacted the Russian Finance Ministry for comment.
Update 06/05/24, 6 a.m. ET: This article has been updated with comment from Boris Grozovski.
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