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Putin Announces Tax Hike For High Earners Ahead Of Constitutional Vote

Russian President Vladimir Putin made the announcment during a televised address to the nation on June 23.
Russian President Vladimir Putin made the announcment during a televised address to the nation on June 23.

Russian President Vladimir Putin has proposed raising income tax on high earners as of next year, as he laid out measures to tackle the economic fallout of the coronavirus pandemic.

Putin made the announcement in an address to the nation on June 23, a week before the country is set to hold a national vote on controversial amendments to the constitution that would open the door for the Russian leader staying in power until 2036.

The president proposed that the tax be raised by 2 percentage points to 15 percent for annual personal income that exceeds 5 million rubles ($72,700) starting January 1, 2021. The hike is lower than what some officials had been calling for in recent years.

The current 13 percent income tax for all citizens was introduced during Putin’s first presidential term in 2001 and has remained unchanged ever since.

The hike would give the state treasury an extra 60 billion rubles ($864.6 million), Putin said, adding that the money raised from the new tax rate could be used to treat children with "severe, rare diseases."

The measure will have little impact on the nation’s budget and reserves, economists said. Russia already has the world’s fourth-largest foreign currency reserves at $570 billion as of June, including more than $100 billion in a so-called “rainy-day” fund to be used during tough times.

Yet Putin has been cautious to tap the reserves despite the significant impact low oil prices and the coronavirus have had on the nation’s economy. Revenues from oil, the nation's main export, slumped amid a price war with Saudi Arabia earlier this year and falling global demand caused by the pandemic.

The tax hike is the second he has announced this year on the wealthy.

In March, Putin called for raising taxes on the dividends Russian companies pay to their owners’ offshore bank accounts.

Isaak Bekker, a Russian financial consultant and Forbes columnist, predicted last year that domestic politics, rather than budgetary needs, would force Putin to soon impose higher taxes on the wealthy.

A tax increase on the rich could play the role of a "national idea," he said, ahead of parliamentary and presidential elections in 2021 and 2024, respectively.

For the strategy to be effective, Bekker said, Putin should offer to spend the money on concrete projects or issues. Bekker made his prediction prior to Putin announcing a surprise vote on constitutional changes.

The tax increase on the wealthy could result in a “potential easing of some social tensions,” ING Bank said in a report. Social discontent has increased in Russia in recent years over stagnant living standards, leading to an increase in protest activity and a decline in Putin's ratings.

In his televised speech, Putin promised that subsidies to families with children and other categories of the population introduced during the coronavirus pandemic will be extended.

He said 10,000 ruble ($144) allowances paid in June to families with children under 16 will be extended to next month.

He said the government will also continue in July and August to provide financial support to citizens who were left without work during the outbreak, and that a program of subsidized mortgage rates to make new housing more affordable will also be extended.

The president also proposed cutting taxes on profits for IT companies from 20 percent to 3 percent.

Russia has reported nearly 600,000 cases of the coronavirus, the world's third-largest caseload.

The country has largely ended its lockdown, but the crisis is expected to cause a 6 percent economic contraction this year.

Power To The Putin: What's In Russia's Constitutional Reforms Package?
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Putin ended his address by calling on Russian voters to take part in the national vote on proposed constitutional changes scheduled for July 1.

If approved, the reform would mean the 67-year-old former KGB officer could run for two further six-year terms, if he chooses, after his current term ends in 2024.

Putin has served as Russian president or prime minister since 1999.

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