The Rich Cry Too: Government Mulls Luxury Tax

Tai Adelaja's picture
The Rich Cry Too: Government Mulls Luxury Tax

Well-heeled Russians may soon have reason to wince, as the Russian government appears to be moving ahead with plans to introduce taxes on luxury and status consumption. The consumption of luxury goods is already high in Russia, but the imposition of taxes on certain luxury goods is coming at a time when a growing number of middle-class Russians are trying to enhance their identity and quality of life with luxury goods, experts say. The luxury tax, which the government plans to introduce next year, is part of Prime Minister Vladimir Putin's "decisive tax manoeuvre," which he said would put the country's natural resource based finances on a more sustainable footing.

Putin's "tax manoeuvre" is aimed at reducing taxation on business people by shifting it onto under-taxed sectors and activities, such as real estate and luxury consumption. Putin first talked about increasing taxes on luxury goods and "excess consumption" in a populist speech at the United Russia Party convention in November, where he also declared his intention to reclaim the presidency. But in a 5,000-word newspaper article published last week, the Russian Prime Minister elaborated on the rationale behind his tax initiative. "We have ways for increasing tax revenues in several directions: expensive property, consumption of luxury goods, alcohol, tobacco, the collection of rent in those sectors where it is currently low," Putin said. "First of all, this is an extra tax on wealth, or rather, on prestigious consumption. The key decisions must be made this year, so that owners of expensive houses and cars can pay higher tax rates next year."

The Prime Minister's idea was not new. Way back in 2007, the left-leaning Just Russia Party proposed levying taxes on luxury on the eve of that year's parliamentary elections. Just Russia Party Head Sergei Mironov proposed then that Russians with real estate valued at 30 million rubles ($1 million) and 100 million rubles ($3.3 million) should pay one and five percent property tax, respectively. He stressed that he was expressing the views of most Russians. His proposal contrasts sharply with the modest 0.1 percent property tax the Economic Development Ministry is planning to introduce in 2015. But, according to surveys released by the independent Levada Centre in October, 53 percent of respondents said they favour increasing the tax burden on the rich. 

Despite broad support, making such radical decisions as the introduction of a luxury tax would seem like a hard sell for the Russian Prime Minister. But as discontent grows among business people over high payroll taxes levied on employers to fund ballooning state outlays on social expenditures, Putin, who hopes to return to the Kremlin in May, has no choice, analysts say. Oksana Dmitrieva, the deputy head of the State Duma Budget Committee, suggested that Putin had hijacked the idea as an afterthought. "We introduced a draft bill to this effect in 2007 and tried to push it through [the State Duma], but the idea was rejected – the United Russia Party was against it," Dmitrieva said. "As far as I can understand, this is an about-face from the Prime Minister." She added that the government could nevertheless rake in up to 300 billion rubles ($10 billion) if taxes on luxury were introduced.

The prospect of raising extra revenue appears to have drawn more people to the ranks of those who advocate high taxes on luxury consumption, which now include leading economists and politicians. Presidential Aide Arkady Dvorkovich said in January that taxes should be imposed on Russians who "own large apartments or two or more apartments." State Duma Deputy Galina Khovanskaya from Just Russia told Russia Profile that “the government should impose additional taxes on owners of apartments and houses that is bigger than 200 square meters. Imposing taxes on luxury, would only affect between five to seven percent of Russians”. Deputy Economic Development Minister Andrei Klepach also chimed in, suggesting that excise tax should be levied on luxury goods. Alexander Kogan, the deputy head of the State Duma's Budget and Taxes Committee, suggested that a one-off luxury tax be levied on purchases worth more than a million rubles.

If, for instance, Russia raises its low excise duties on tobacco and alcohol to the European average, the government could raise an extra $35 billion in taxes yearly, Reuters reported, citing Delovaya Rossiya, a business lobby group. The taxman now takes only 51 rubles ($1.70) on a half-litre bottle of vodka, and nine rubles ($0.30) on a packet of 20 cigarettes, according to the agency. High-ticket items like premium-class cars could also yield huge tax-revenues. Last year, Russians bought 61,760 luxury cars, each with a price tag of over $100,000, according to the Autostat agency. However, in a country where tax dodging remains a rampant problem, a major hurdle for the government is enforcing compliance. "If they set a higher rate for rich people, that will increase tax evasion", said Yevsei Gurvich, the head of the Economic Expert Group. Another problem, he said, is that the Russian Civil Code does not define the term “luxury” or "wealth".