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, with new ecology, waste and telecoms taxes, to name a few, as well as the consolidation of ‘duty’ payments into federally enforced taxes . There are signs the Tax Service is growing in confidence, recently proposing to expand its juridical scope to regain control of criminal cases against business.
Are these signs of more effective state, and thus the potential for its bureaucracies to serve more than a few citizens? Or are they examples of the centre’s fiscal cul-de-sac, as it seeks a human replacement for falling natural resource revenues (encapsulated in the recent idea of ‘people as the new oil’). In this post I will review the significant recent changes in taxes that affect individuals (businesses are important but will be dealt with another time). A shorter version of the post appeared in Ridl.io, along with a Russian translation.
First, we need a little history. Russia’s flat-tax is famous as one of the first, boldest reforms of this type in the world with a big cut in income tax from a higher rate of 30% to 13% in 2001. However, Putin’s first years were characterized by even more radical neoliberal taxation reform across the board that built on the IMF programme of 1998 in response to Russian 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 businesses and gave a kick-start to both the legitimacy and bureaucratic logic of the Tax Service going into the 2000s. Employees and entrepreneurs alike were eased into the new economic system, all thanks to the flat tax and low profit taxes. Why was this important? For ‘cultural’ as much as institution-building reasons. Income taxes in the late Soviet period had generally been very low. Taxes were less ‘visible’ as deductions in socialist societies, and the link between them and the provision of services was equally opaque (Alm et al 2006). People more often linked ‘social security’ to the visible and significant paternalistic obligation of their employer, not the state. Thus ‘tax morality’ was an issue in the 1990s, and arguably remain so today. (aside: it still surprises me that scholars don’t make more of the fact that for nearly 80% of the population, incomes declined year-on-year for nearly ten years, so the fact that tax ‘morale’ was low is hardly surprising – see Alm et al. 2006).
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 and the fact that it dominates in 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 been always rising, but from a tiny base in 2000 and is thus not a very meaningful measurement considering GDP has grown much faster. Indeed, as a share of GDP, Ukraine better qualified now as a ‘tax-paying state’ than Russia.
Like other flat taxes, the Russian one has no allowances (which are typically set at a level around the minimum wage, as it is in the UK, for example). Therefore, even the very working-poor pay it. In addition, there is a ‘hidden’ regressive element in the form of the employer’s obligatory deductions for social insurance and pension contributions. The more you earn (starting from an income of around 14,000 Euro a year), the less as a percentage of income the employer contributes. Taking into account the employer and employee deductions, average income-related taxation is more like 33%. (Only medical insurance contributions are not regressive – hat-tip: Ilya Matveev).
Lack of allowances and the relatively large burden of pension and social insurance deductions are major disincentives to register self-employment income because it is so variable. Moreover, there is little or no evidence that the tax reforms really improved revenue collection, productivity, economic activity and trust in the general fiscal system (Kryvoruchko 2015; Appel and Orenstein 2013). More likely, the rapid improvement in the Russian economy after 1999 was the cause of higher revenues – incomes increased, not compliance (Ivanova 2005 et al [opens as pdf]). The fact that this story is rarely heard is a measure of the dominance of orthodox supply-side economics to this day. In fact, the IMF often criticised the introduction of flat taxes, citing the already weak fiscal position of former communist countries (Domonkos 2015).
Fast-forward to the late 2010s, and against the backdrop of inadequate natural resource revenues the Russian state has returned to the thorny issue of taxes in earnest. However record income tax receipts are only a small part of the story. In Russia personal income taxes have only ever been a small share of all tax-like revenues (Gaddy and Gale 2005), as in Soviet times. Direct personal taxes as a share of all taxes and as a share of GDP are around half of that found in other highly-educated, and industrialised market economies. Despite this, there is little sign of any political will for a return to progressive taxation, even though it might raise significantly more tax from the 11 million ‘better paid’ Russians. More important is the repeated failure to tax the self-employed and the 2019 changes to taxation of land and property.
Let’s take the self-employed first – remembering that even for people with jobs, ‘side-work’ is an important category for making ends meet. Until the Ukraine/sanctions crisis in 2014, personal income derived from the informal economy was effectively ignored by both politicians and the bureaucracy. It is true that the most visible self-employed were ‘tax registered’, perhaps best 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 – from electricians to home-visit beauticians, operated in a black hole – their complete bureaucratic invisibility was part of a permissive deal with society. This ‘compensated’ for extremely low disposable incomes from formal work, at the same time as allowing ordinary people something of niche in an entrepreneurial climate increasingly dominated by large firms with ‘connections’ to those in power. However, that niche is rapidly disappearing due to the expansion of state-connected large firms.
After 2014 the government put more energy into pursuing the self-employed, to bring them into the formal purview of the state, including taxation, licensing, national insurance, pension payments, etc. The latest version of this is the ‘tax on professional incomes’ starting January 2019. However, each initiative has failed, but for multiple reasons. Firstly, much existing tax law is poorly written, especially concerning 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 actual ‘side-employed’, not reliant only on a ‘trade’ income. Consequently, they are extremely resistant to the formalisation 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, but goes back to way incomes in the USSR were made of multiple 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 devaluing and degrading to people who consider themselves versatile ‘masters’ of trades and ‘authoritative’ individuals in their meta-occupational communities – a term I find useful to talk about mutual-acknowledgement networks of skilled workers).
Thirdly, when the economy not growing and people are economically hurting, they rely even more on the informal ‘cushion’ of side-incomes. Fourthly, the state doesn’t really have as much of an incentive as it appears to squeeze for income tax, as it is regional budgets that depend on direct taxation revenue, not the federal centre (which only takes a cut of 15% of income tax collected).
Finally, and this is important because it contradicts the narrative of the ‘effective taxation state’, the Russia really lacks the political conditions to correct this situation. 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, against the backdrop of real declines over the last decade in incomes.
This 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 that a source of ‘wealth’ that is 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, and the lack of awareness of the majority of people about this, as well as the potential ‘compounding’ effect over time of increases in these 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 takes into account the real value of land, and so will mainly affect older properties in desirable areas. Thus, an owner of a three-room Brezhnev era flat of 60 square metres close to a metro station in Moscow will have seen their taxes increase by a factor of six.
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.
And this is in addition to Land Tax – in 2019 significant changes were made to this tax as well (local authorities keep this tax). With some exceptions, land with houses on it will attract a tax of 1.5%. This is doubly significant given that previously people only paid a symbolic amount of tax on their ‘country cottage’. Given how many people of different classes and incomes own ‘second’ properties in addition to an apartment, these tax changes are likely to prove onerous and perceived as unjust (pensioners and other groups are exempt from some of them). Property taxes are also likely to accelerate concentrations of wealth even more, and it’s easy to imagine Russia becoming a country of renters, rather than owner-occupiers in less than a generation.
People are now finding out the hard way that immovable property above an arbitrary norm the ‘izlishka’, dictated by the state can be subject to rapid increases in tax over a short period. The izlishka is calculated for all kinds of property and is quite miserly – if you own more than 10 square meters of a room you pay tax on the rest of that room, for example. It is quite common for flats to be divided into ownership by room, even by members of the same family. Thus, even a very modest flat of 42 square meters in a provincial city worth 1.3m roubles will attract a tax of 700 roubles. Not a lot, but given that all taxes fall due at the same time in November, it will be felt as one more example of the squeeze, alongside the near tripling of taxes on waste collection.
These increases have been in the offing since 2011. Back then, the average Land Tax paid was tiny – around 800 roubles a year. State income grew rapidly from such taxes despite the low base – nearly doubling from 2008-2012. Some regions did not apply all these land taxes but the significant change in 2018 is the harmonisation of all regions in the obligatory extraction of these taxes.
Ironically, recently Putin charged the government to investigate the problems of the growth in the ‘population’s tax burden’, asking 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 make for a likely future confrontation of elite versus ‘populist’/social-justice political entrepreneurs – as yet unidentified. In the meantime we will observe an intensification of the struggle to formalise incomes, and the equal resistance to do so among self-employed in particular.
Even in highly developed market economies with long-standing social solidarity and high personal taxes like Denmark see much political debate of the burden of direct taxation, the ‘value for money’ of the enormous tax revenues their systems provide. These are the fundamental tensions inherent in any tax-paying democracy where resource and indirect revenues are less important. The scholar Simon Kordonsky deserves the final word. Writing about the role of the shadow economy in Russia, his response to the wave of measures to formalize the economy is this: ‘don’t touch people who live by their own resources‘ [za svoi schet]. What he means is that the majority only ‘survive’ today to the degree they can escape the ‘field of view’ of the state. He also gives the example of the rational response to a new tax on heavy goods vehicles’ use of highways: people simply shift to smaller trucks. Taxes are just a form of moving national income from one place to another, or in progressive scenarios, redistributing. But how is it even possible to build a tax-paying non-democracy, when the logic of redistribution functions mainly in terms of a vertical – upwards from the most active, but most powerless, to unproductive elites?