Russian tax authorities boast of record collections in the last couple of years. In 2017 collections were 20% higher than in 2016. At the same time the number of taxes is expanding. There are new environmental, waste and telecoms taxes, to name a few, as well as the consolidation of ‘duty’ payments into federally enforced taxes. The Tax Service seems to be growing in confidence; it recently proposed expanding its scope to regain control of criminal cases against business.
Are these signs of Russia turning into a ‘tax-paying autocracy’?It would seem timely given declining natural resource revenues and all the fresh talk of ‘people as the new oil’. That said, would this equate to a more effective state, or just a fiscal cul de sac? To answer these questions, it is worth honing in on changes in taxes that affect individuals (businesses are important too, but will be dealt with another time). First, though, a little history. Russia’s flat-tax is famous as one of the earliest and boldest reforms of this type in the world. It meant a big cut in income tax from a higher rate of 30% to 13% in 2001. However, Putin’s first years saw even more radical neoliberal tax reforms across the board. These added to the IMF programme of 1998, which was conceived in response to Russia’s debt default. The flat tax was part of a package that included lowering corporation and other taxes, and increasing tax collection via VAT. These changes arguably helped small and medium-sized businesses and gave a kick-start to both the legitimacy and bureaucratic logic of the Tax Service going into the 2000s.
The fundamental idea of a flat tax generally is to expand the tax base – reports vary, but perhaps a majority of people who should have paid income taxes in the 1990s did not. This continues to be important in Russia because of the large size of the informal economy – now at a record size even according to official statistics, at 20% of employment and 13% of GDP. IMF figures show more like 40% of GDP in the ‘shadows’, whereas in most developed economies the share of GDP is less than 10%. Regardless, even the Russian government admits full sources of income for over 38 million Russians (over 44% of the economically active) are opaque to the authorities.
The informal economy dominates how people calculate their real incomes. Perhaps the majority of people have a ‘white’ income – which is subject to income tax, and an informal extra income source, which is not taxed directly. Tax revenue has always been rising, but from a tiny base in 2000. Thus it is not a very meaningful measurement considering GDP has grown much faster. Indeed, as a share of GDP, Ukraine better qualifies now as a ‘taxpayer state’ than Russia.
Moreover, there is little or no evidence that those tax reforms really improved revenue collection, productivity, economic activity and trust in the general fiscal system. More likely, the rapid improvement in the Russian economy after 1999 was the cause of higher revenues. Higher incomes were much more important than greater compliance. That this story is rarely heard shows the dominance of orthodox supply-side economics to this day. In fact, the IMF often criticised the introduction of flat taxes. It cited the already weak fiscal position of former communist countries.
Fast-forward to the late 2010s. Against the backdrop of inadequate natural resource revenues, the Russian state has returned to the thorny issue of personal taxes in earnest. However, record income tax receipts are only a small part of the story. Indeed, in Russia personal income taxes have only ever been a small share of all tax-like revenues. Direct personal taxes as a share of all taxes and as a share of GDP are around half of that found in other industrialised market economies. More vital is the repeated failure to tax the self-employed and the 2019 changes to taxation of land and property.
Take the self-employed first; remember how even for people with jobs, ‘side-work’ is a key way to make ends meet. Until the Ukraine crisis in 2014, personal income from the informal economy was effectively ignored by both politicians and bureaucrats. The most visible self-employed were ‘tax registered’, symbolised by quasi-private transit operatives (marshrutki drivers operating as lone, or ‘small traders’ in tax terms). However, the vast majority of ‘tradespersons’ and individual service providers operating without premises – from electricians to home-visit beauticians, existed in a tax black hole. Their complete bureaucratic invisibility was part of a permissive deal with society. This ‘compensated’ for very low disposable incomes from formal work. At the same time, it let ordinary people have a niche in an entrepreneurial climate dominated by larger firms with ‘connections’ to those in power.
After 2014 the government put more energy into pursuing the self-employed. The aim was to bring them into the formal purview of the state, including taxation, licensing, national insurance, pension payments, etc. The latest version of this? The ‘tax on professional incomes,’ effective January 2019. However, each initiative has failed, for many reasons. First, much existing tax law is poorly written. Especially on definitions of legal persons. Not only that, but the Labour Code too is lacking a clear definition of the self-employed.
Secondly, as mentioned above, the vast majority of ‘self-employed’ are actually ‘side-employed’. That is, they are not reliant only on a ‘trade’ income. So, they resist the formalising of what they see as a ‘top-up’ income. In other words, informal work is ingrained as a kind of socio-economic right. This is a legacy of more than the 1990s’ economic disruption. It goes back to the way incomes in the USSR were made of many components beyond the ‘wage packet’. (Actually there’s a more complex story here too about ‘cultural’ resistance to the term ‘self-employed’ (samozaniatyi) – the historical association with murky ‘trade’ is one reason (to be in trade is to be an exploiter of disorder). Also there’s something about the term ‘entrepreneur’ (the other legal term) and ‘self-employment’ that is interpreted as devaluing and degrading by people who consider themselves versatile ‘masters’ of trades and ‘authoritative’ individuals in their meta-occupational communities – a term I find useful to describe mutual-acknowledgement networks of skilled workers).
Finally, the narrative of the ‘effective taxation state’. The Russian authorities have linked high quality digital records for VAT and property ownership. However, because many personal services, informal self-employment, as well as even some elements of formal wages (called ‘envelope wages’ for a good reason), are largely conducted in cash and without a ‘paper trail’, taxes on income will only ever capture a fraction of these flows.
Moreover, political conditions to correct this situation are absent. A fundamental tension in any society is the balance between taxes on incomes versus immovable and trackable assets. And the degree of success in taxing incomes is always a question of consent. In anything, ‘consent’ to the state taking a slice of one’s hard-earned crust is falling. That is set among real declines over the last decade in incomes.
Sin Taxes and Property
It brings us to the current phase. Alongside ‘regressive’ increases in VAT and ‘sin taxes’, as well as rise in taxes on fuel, the state has learnt how a source of ‘wealth’ more difficult to hide than income is immovable property. The real story of changes in the taxation landscape is the big switch to property and land tax. Public knowledge about this is lacking; the same goes for the potential ‘compounding’ effect over time of increases in these (previously low) rates.
Since 2017 the government has undertaken fundamental reform in tax liability of property. One aspect is the shift to assessing immovable property on cadastral value. Cadastral assessment is a blunt tool based on averages which may be far from the realty real values. There has already been a clear impact, with revenues from this tax rising from 22bn rubles in 2013 to 144bn in 2017, a seven-fold increase. Phased in over five years, at the end of that period the Property Tax will have risen by 20%. This might not seem much given the low starting base of 0.1%, but for houses as opposed to apartments, the starting point of the tax is 0.3%. Strikingly, even structures like garages will be liable for Property Tax.
Aside from the Land Tax, key changes came to this tax in 2019 (local authorities keep this tax). With some exceptions, land with houses on it will attract a tax of 1.5%. This is doubly vital given how before people only paid a symbolic amount of tax on their ‘country cottage’. Because so many people of different classes and incomes own ‘second’ properties, these tax changes are likely to prove onerous and perceived as unjust (pensioners and other groups are exempt from some of them).
Ironically, recently Putin charged the government to investigate the problems of the growth in the ‘population’s tax burden’. He asked Medvedev to investigate ‘what is happening in real life, and not just on paper’. What does this reveal? In reality, the simultaneous ratcheting up of all kinds of taxes and quasi-taxes – excise duty, land taxes, personal taxes, transport-related taxes and indirect taxes brew a likely future confrontation between elites and the rest. It opens the door for emergent ‘populist’/social-justice political entrepreneurs. In the meantime we will observe an intensification of the struggle to formalise incomes. There will be resistance to do so among self-employed in particular.
Even developed market economies with long-standing social solidarities and high personal taxes such as Denmark experience much political debate on the burden of direct taxation. The ‘value for money’ of the enormous tax revenues their systems provide is constantly under scrutiny. These are fundamental tensions inherent in any tax-paying democracy where resource rents and indirect revenues are less important. Taxes are mainly a way of moving national income from one place to another to boost growth and increase efficient use of resources. In progressive scenarios, they are about redistributing wealth from the more to less fortunate. But how is it even possible to build a tax-paying autocracy when the logic of redistribution functions mainly via a such a peculiar power vertical.