Military Levies: Tax hikes mark a transition from temporary to permanent revenue mobilisation

In his address to the Federal Assembly, Vladimir Putin announced a transition to a progressive tax scale. However, Russia has been experiencing almost continuous tax increases since 2018, when Putin's current presidential term began. The most significant were the increases in personal income tax in 2021 and the set of emergency one-time tax levies from last year. In 2024, such measures are expected to provide up to 60% growth in budget revenues, planned at 6 trillion rubles. However, last year they were temporary measures that were designed to end the war relatively soon. Since then, it has become clear not only that the war will not end this year, but also that its end will not lead the Russian government to change its budget priorities. According to media reports, from next year, personal income tax may rise from 13% to 15% for Russians earning more than 1 million rubles a year, and from 15% to 20% for those earning more than 5 million. Income tax may also rise from 20% to 25%. In total, these measures could generate up to 4 trillion rubles a year, providing the budget with an additional margin of safety, including in case of a long war. However, even if the war ends, the budgetary demand is unlikely to decrease, as building up the capacity of the military machine will remain Putin's top priority. Moreover, although the new tax structure shifts the budget burden onto non-oil and gas revenues, it is largely conditional: in the event of a crisis, company profits and, consequently, income from the profit tax will shrink.

In his pre-election address to the Federal Assembly on 28 February, Vladimir Putin announced another tax increase. It is worth noting that since his re-election for a fourth presidential term in 2018, increasing the tax burden on households and businesses has become a truly permanent process, each stage of which, however, is preceded by a campaign of assurances that 'there are no plans to raise taxes'.

In 2018, an increase in the retirement age was announced, effectively reducing the state's social obligations to taxpayers. At the beginning of 2019, the VAT rate was increased from 18% to 20%, bringing the budget around 500 billion in the first year and about 700 billion in the following years. At the height of the pandemic, the personal income tax (PIT) was carefully 'unsealed' - the flat scale of this tax had existed since 2002 and remained a kind of foundation of the Russian tax model. However, a progressive rate of 15% was introduced from 2021 only for incomes above 5 million roubles, i.e. it concerned a small group with incomes above 417,000 per month. In this sense, the measure appeared more symbolic than anything, and, according to the government's calculations, it should have brought the budget a modest 60 billion rubles a year. However, this fiscal innovation had a catch — the money was supposed to be 'earmarked' for the treatment of children with rare diseases, the purchase of expensive drugs, equipment and rehabilitation devices, as well as high-tech surgeries. This set a precedent: the income from the increased personal income tax rate, which is mainly a tax that fills regional budgets, was diverted to the federal budget. From 2021, taxation (13%) was also introduced for large (over 1 million rubles) income from deposits and securities — another type of levy on the 'rich'.

The pandemic crisis, and then the sanctions shock, temporarily halted fiscal innovation. However, in 2023, when it became clear that the economy was recovering thanks to budget stimulus and high export revenues, and macroeconomic turbulence allowed businesses to make significant profits, a whole set of measures was introduced to seize them. The largest and most high-profile of them was the windfall profit tax, which was designed to retroactively seize 300 billion roubles of income from businesses. However, this is only the tip of the iceberg.

According to calculations by the government-aligned Centre for Macroeconomic Analysis and Short-Term Forecasting (CMASF), the growth of budget revenues in 2024 will be ensured by the following tax innovations: personal income tax (PIT) on income from deposits (102 billion); introduction of export duties tied to the ruble exchange rate (453 billion); significant increase in rates for environmental taxes (306 billion); one-time receipts of other non-tax revenues, including the allocation of balances of unified tax payments (850 billion); allocation of interbudgetary transfers transferred from state extrabudgetary funds to the federal budget due to the expiration of deferrals granted in 2022 for insurance premiums (770 billion). On top of this, there are added measures to increase oil and gas revenues via the reduction of payments to oil companies on fuel dampers, increase in Mineral Extraction Tax for Gazprom, as well as legislative reduction of the discount of Russian oil to Brent.

In general, federal budget revenues in 2024 are expected to grow by more than 20%, reaching 35 trillion rubles compared to the previous year. Oil and gas revenues should increase by 30.4%, to 11.5 trillion rubles, while non-oil and gas revenues are expected to increase by 16.1%, reaching 23.3 trillion. The ratio of oil and gas to non-oil and gas revenues will be 30% to 70%. Back in 2021, the ratio was 36% to 64%, while in 2019 it was 39% to 61%. Revenue mobilisation in 2023-2024 was intended to finance extreme military spending while maintaining 'social stability' (→ Re: Russia: Military Hybrid). However, most of the measures are one-off or temporary. As early as 2025, the government expects a 4.3% (1.5 trillion roubles) reduction in revenue. Such a dynamic would theoretically be possible if the war in Ukraine ended this year and the government is able to cut expenses.

In his address to the Federal Assembly, Putin announced a transition to a progressive personal income tax (PIT) scale, but later it became public that an increase in income tax was also being discussed. According to Bloomberg and the publication 'Important Stories', personal income tax may increase from 13% to 15% for Russians earning more than 1 million rubles a year, and from 15% to 20% for those earning more than 5 million. Corporate income tax will increase from 20% to 25%. According to a report from The Bell a year ago, the Russian Union of Industrialists and Entrepreneurs (RSPP) itself suggested that the authorities abandon one-time payments from large companies in favour of increasing the corporate profit tax, but only by 0.5 percentage points. Thus, Putin 'responded' to the business proposals, but increased the scale of additional levies tenfold.

Unlike the pandemic trial balloon, the current personal income tax increase will cover a significant number of working Russians. The increased rate of 15% will affect those who earn more than 83,300 rubles per month. According to Rosstat, the average salary in Russia in 2023 was 73,700, but 15% of Russians had incomes above 75,000. This measure will primarily affect residents of major cities: in Moscow, the average monthly nominal salary in 2023 was 136,000 rubles, in St. Petersburg it is 95,000. However, according to media reports, the increased rate will apply only to income that exceeds the threshold value, that is, the tax costs of an average Muscovite with a salary of 136,000 rubles will increase by about 1500 rubles.

An anonymous expert, whose assessment is quoted by 'Important Stories', believes that the increase in personal income tax will generate about 450 billion a year, and the increase in income tax, about 2 trillion a year. Bloomberg Economics estimates that the measures under discussion could generate up to 4 trillion rubles in revenues. However there remains some mystery as to which budgets these funds will be channelled. Most of the personal income tax levied at the rate of 13% goes to regional budgets (85%), while a smaller part goes to local budgets (15%). The precedent set in 2021 is that revenues from the increased rate are 'earmarked' and directed to the federal budget. Profit tax also goes to different budgets: 3 out of 20% goes to the federal budget, 17% to the budgets of the subjects. Last year, revenues to the consolidated budget from personal income tax amounted to 6.5 trillion rubles, and 7.9 trillion rubles from corporate income tax. This is almost a quarter of all revenues to the consolidated budget, which amounted to 59 trillion rubles. However, supporting regional budgets in the new military reality is also an important task for the federal government: more than 10% of all federal transfers to regions now go towards the ‘development’ of occupied territories in Ukraine (→ Re: Russia: Torture, Money, and the Housing Issue).

The tax innovations follow the logic of turning temporary revenue mobilisation into permanent mobilisation and may not be the last news we see on this issue. According to data from the Ministry of Finance, the budget deficit amounted to nearly 1.5 trillion rubles by the end of the first two months of 2024, compared to the planned 1.6 trillion rubles for the whole year. However, the same logic of advance financing of expenditures was used last year, and in the end, the government maintained the main parameters of the budget — there was no unplanned growth of expenditures during the year. In general, the mechanism of advance financing is risky in that the government first finances expenditures and only then finds out whether revenues will meet the plans. However, the needs of shifting the economy to a military setting, financing 'structural manoeuvre' (adaptation to sanctions) and reorientation of transport infrastructure from the West to the East dictate this approach. In this regard, the CMASF experts cautiously point out that 'although the current plans preserve the sustainability of the budget system', in reality it will be shaken if any of the conditions underlying the government's projections change, i.e. in case of insufficient revenue growth, increased expenditures in 2025-2026, continued high interest rates for a longer period of time, lower than expected economic growth rates or lower oil prices. Moreover, the projections for 2024 themselves appear quite optimistic. To achieve the desired 20% revenue growth, Russian GDP in 2024 must increase by 2.3% (while the Central Bank expects 1–2%), the Urals barrel must cost $71 (which is not the case in the first months of the year), and the dollar must be around 90 rubles.

Thus, tax innovations together with the previous revenue mobilisation measures should provide the budget with an additional margin of safety, including in the event of a long war. However, even in the event of its conclusion, the budgetary demand is unlikely to decrease — the task of rebuilding the military machine and enhancing its capabilities will remain the Kremlin's top priority. In addition, as we can see, the new tax structure shifts the budgetary burden onto non-oil and gas revenues. However, this shift is largely conditional: in the event of a crisis, company profits and consequently income from corporate tax diminish.

Experts had previously forecasted that as the National Wealth Fund (NWF) funds were depleted due to the increase in military expenditures, the government would turn to mobilising personal and corporate taxes. According to the Ministry of Finance, in 2023, almost 4 trillion rubles was spent from the NWF, and it had only 5 trillion rubles in liquid funds, although before the war it reached 8.8 trillion rubles.

Against this background, the new large-scale 'national projects', announced by Putin in his address seem somewhat unexpected. These, of course, are not included in the budget projections for 2025-2026 ('Family', 'Personnel', 'Youth of Russia', 'Data Economy', 'Long and Active Life'). Experts polled by Reuters have estimated that they will cost at least 2 trillion rubles a year to implement, and their total budget is estimated at 11.5 trillion rubles. Traditionally, in Putin's budgetary system, 'national projects' are a mechanism for distributing additional revenues, which are not anticipated in this case. However, it cannot be ruled out that the national projects are largely a 'cover operation' designed to justify tax increases to the general public. The Russian government has a long experience of scuttling Putin's high-profile initiatives, which are announced in his addresses to the Federal Assembly but have no revenue base. The national projects which have been announced may also become a justification for the withdrawal of additional fiscal revenues for the federal budget.