Russian tax policy under sanctions pressure: theoretical approaches and alternative directions for practical implementation

Mel'nikova Nadezhda Petrovna PhD in Economics Professor, Senior Research Fellow, Associate Professor, Department of Taxes and Tax Administration, Financial University 15 Verkhnyaya Maslovka str., office 507, Moscow, 127083, Russia nmelnikova@fa.ru

Tikhonova Anna Vital'evna ORCID: 0000-0001-8295-8113 PhD in Economics Associate Professor, Leading Researcher, Department of Taxes and Tax Administration, Financial University 127083, Russia, Moscow, Verkhnyaya Maslovka str., 15, room 507 samozvanka_89@bk.ru Other publications by this author

introduction

Tax policy is an integral part of the higher-level state policy. This approach is fixed in many modern definitions of tax policy. For example, the Financial and Encyclopedic Dictionary defines tax policy as an integral part of financial policy ^[1]; Wikipedia as an integral part of socio—economic policy ^[2]. Subordination of tax policy to the tasks of state policy at a higher level, as well as the orientation of tax policy towards solving socio-economic problems of society, is an essential feature of tax policy itself. Currently, the socio-economic objectives of the development of Russian society in a concentrated form are reflected in 38 state programs in 7 areas and in 14 National projects. At the same time, tax policy has a certain degree of independence, since the implementation of the tasks of state programs requires attention to the needs of the development of the tax system itself and tax regulation as an integral part of tax policy. The dual content of the essence of tax policy is most fully reflected in its following definition:   "tax policy is a set of economic, financial and legal measures of the state to form the country's tax system in order to meet the financial needs of the state, individual social groups of society, as well as the development of the country's economy through the redistribution of financial resources"^[3]. 

It should be noted that at each time interval, tax policy faces challenges caused by a combination of external and internal factors that force appropriate adjustments to tax legislation. Over the past five years, external factors have had the greatest impact on the modern tax system. Such factors include, for example, the involvement of a country in an armed conflict; the consequences of the introduction of "medical" isolation in a pandemic (COVID-19 pandemic); economic sanctions, both from individual countries and from various international unions and associations. The latter factor will be given special attention in the framework of this study. It is also important to take into account that in modern Russian conditions, the pre-election phase of the so-called business cycle, conditioned by political motives, is superimposed on the sanctions factor. This should be taken into account when developing tax instruments to support the economy. The point is that politicians can manipulate tax policy in order to maximize voter support during election campaigns ^[4]. 

THE SANCTIONS FACTOR OF MODERN RUSSIAN TAX POLICY

The most significant external challenge that the Russian tax policy has faced in the last decade (2014-23) has been large-scale economic sanctions, both from individual countries and from various international unions and associations.

Until 2014, sanctions were applied against Russia, but these were sanctions imposed against individual citizens and organizations of the Russian Federation. These sanctions were of a one-time nature, and therefore did not exert serious pressure on the national economy. For example, on April 12, 2013, the US Treasury Department published a list of 18 representatives of law enforcement agencies and the judicial system of Russia who were barred from entering the United States, and their American assets were frozen. In 2020-2021, the Russian economy, like the entire world economy, was under pressure from the economic consequences caused by the COVID-19 pandemic. In 2022, the Russian economy faced a global challenge of sanctions pressure unprecedented in recent history in its scale and depth. Figure 1.3 shows the rating of countries that have experienced sanctions pressure by the number of economic sanctions imposed on them (as of 31.07.2023).

Source: compiled by the author according to ^[5].

Figure 1.1 – Ranking of countries by the number of sanctions imposed in 2014-23, as of 07/31/2023

More than 13,000 different kinds of economic sanctions were imposed on Russia after 2022. This significantly exceeds the number of sanctions against Iran, which previously led in the issue of external sanctions pressure on the national economy. It should be noted that the negative consequences of sanctions pressure from the collective West are layered with such a factor as the need to overcome the ongoing negative consequences caused by "self-isolation" during the COVID-19 pandemic.  The structure of sanctions pressure on facilities in the period 2014-2023 is shown in Figure 1.2.

Source: compiled by the author according to ^[5].

Figure 1.2 – The structure of sanctions pressure on Russia by objects in the period 2014-23. (as of 31.07.2023)

As of July 31, 2023, economic sanctions were imposed on more than 10,000 individuals, 3,251 organizations, 102 aircraft and 142 water vessels.

The structure of sanctions pressure on the Russian economy from the perspective of the countries that imposed sanctions is also interesting (Figure 1.3).

Source: compiled by the author according to ^[5].

Figure 1.3– Country-by-country structure of sanctions pressure in 2014-23, (as of 05.04.2023)

The palm belongs to the United States, which has imposed more than 2,500 sanctions. Switzerland (2,109 sanctions) and Canada (1,946 sanctions) occupy the second place, the United Kingdom (1,624 sanctions) takes the third place.

As the analysis showed, the reasons, scope and depth of the impact of external factors on the tax policy in 2014, 2020 and 2022 were different. However, in all three cases, the common thing was that the tax policy measures were carried out within the framework of the strategy adopted by the state to prevent the growth of the tax burden and fundamental changes in the tax system itself. Starting from 2022, an important factor in the development of tax policy has become an objective increase in the need to increase the revenue side of the budget in the conditions of ITS implementation. Tax policy, of course, should answer the question of possible sources of tax revenue growth. Moreover, this issue should be resolved in the context of the implementation of the strategy, the implementation of all economic and social development programs adopted by the state, the inevitable growth of social expenditures of the budgets of the budgetary system in connection with the provision of large-scale assistance to the participants of ITS, mobilized citizens, and their family members.

TAX POLICY INSTRUMENTS TO MITIGATE THE NEGATIVE EFFECTS OF ECONOMIC SANCTIONS

The most frequently used tax instruments to mitigate the negative consequences of various kinds of external challenges in world and Russian practice are the following (Table 1.1).

Table 1.1 - Tax instruments to mitigate the negative consequences of external challenges

Source: compiled by the authors themselves.

The study of practical Russian experience in the period 2014-21 on overcoming the negative consequences of external factors (the global financial crisis, economic sanctions, the COVID-19 pandemic) allowed us to identify the following instruments of tax policy.

 1. Providing tax support to those categories of taxpayers who have been most affected by Western sanctions. In this case, the most useful is the existing experience of tax regulation in the period 2014-2019 and the period 2020-2021. Here we are talking about tax support for small and medium-sized businesses, which primarily bear losses, and the volume of losses puts them on the verge of closure. The invaluable experience of tax regulation in the face of the negative economic consequences of the COVID-19 pandemic was the ranking of the affected industries and areas of activity, as well as the identification of the most effective tools for each group. The set of specific tax instruments used at that time is diverse. For example, exemption from VAT from 2020 for the provision of a number of services:

- catering services through public catering facilities, and outside of public catering facilities at the place chosen by the customer (field service);

- works (services) for the production of film products performed (rendered) by cinematography organizations, rights to use (including rental and screening) of film products that have received a national film certificate.

In the same year, a zero VAT rate was established for services for the provision of rental or use on another right of objects of the tourism industry put into operation (including after reconstruction) after January 1, 2022.

In 2020, the corporate income tax rate was set at 3% to the federal budget and 0% to the regional budget for Russian organizations operating in the field of information technology, starting from the tax period of receipt of a document on state accreditation of an organization operating in the field of information technology. Since 2022, they have also started paying income tax to the federal budget at a zero rate.

In order to support small and medium-sized businesses, a tax benefit of limited temporary effect was applied, which is known as tax holidays. In 2015, the subjects of the federation were given the right to establish a zero single tax rate based on the results of economic activity (within the framework of the application of a special tax regime of the USN) for newly registered sole proprietors. The 0% rate was applied from the date of state registration of the sole proprietor continuously for two tax periods.  These tax holidays were granted only to those sole proprietors who carried out entrepreneurial activities in the industrial, social and (or) scientific spheres, as well as in the field of household services to the population.  A similar tax benefit was also applied under the special tax regime of the PSN.

Of the rich arsenal of tax instruments to support victims of sanctions and COVID-19 for use in the present conditions, it should be considered ineffective to grant tax deferrals, since the most difficult period for the Russian economy (the second and third quarters of 2022) has already been passed, and the system of Western sanctions will remain for years to come.

2. Search for effective and fair tools to increase budget revenues in connection with the objective inevitable growth of the expenditure part of the budget. Under the present conditions, it is advisable to solve this problem by redistributing the tax burden between individual groups of taxpayers and individual spheres of activity through "tax maneuvers". Increasing the tax burden on the population through the transition to a progressive income tax is definitely unacceptable. This is due both to the fact that the consequences of economic sanctions have affected the real incomes of the population, and to the need to ensure public support for public policy during the election campaigns of 2023 and 2024. However, the instruments used in 2018 and 2021 to replenish the revenue side of the budget attract attention. In order to find additional federal budget revenues in the amount of 60 billion rubles, the VAT rate was increased from 18% to 20% from January 01, 2018. With a certain surge of media attention to this measure, the society calmly accepted this step in the field of tax policy. Indirect taxes hidden in the price make them psychologically easier for the population. This feature of indirect taxes is one of their advantages over direct taxes. The reserve for the growth of the revenue potential of the budget may be the expansion of the list of excisable goods at the expense of goods and services classified as "luxury", which corresponds to global tax practice. As part of overcoming the negative economic consequences of the COVID-19 pandemic, an increased personal income tax rate was also introduced. The introduction of an increased personal income tax rate of 15% from 2021 for incomes exceeding an annual income of 5 million rubles was announced by the President as a measure of additional taxation of persons with high incomes. At the same time, this innovation has a low regulatory potential, since the equivalent amount of the additionally collected personal income tax is not distributed among other groups of the population in the form of social transfers, but is sent to the charity fund for the support of children with severe life-threatening and chronic diseases, including rare (orphan) diseases "Circle of Good". In this regard, for the purposes of developing the redistributive potential of taxation, one of the directions of shifting the tax burden to the rich strata of the population may be the revival in the Russian Federation of the property tax, which passes in the order of inheritance and (or) donation. These measures will be approved by the society as a whole and will bring a certain fiscal effect.

3. Tax support for organizations undergoing the process of re-profiling for the purposes of the military-industrial complex in the conditions of ITS implementation. To solve this problem, it is possible to apply such tax benefits as an investment tax credit, exemption from paying corporate property tax for two tax periods; deferred payment of corporate income tax or zero corporate income tax rate to the federal budget for a certain period; zero VAT rate for a two-year period. It is important to note that in the context of this direction of tax policy development, it is necessary to assess the joint effect of the use of tax incentives and other incentive mechanisms (concessional loans, budget subsidies). Due to the priority and the need to provide military-industrial complex enterprises with financial resources in the shortest possible time, a comprehensive assessment of all incentives is at the forefront.

4. The most difficult task of the state's economic policy in the face of unprecedented sanctions pressure from the collective West is the task of ensuring technological sovereignty. In accordance with this, the priority task of tax policy is the formation of a set of effective tax incentive tools for organizations that ensure the technological sovereignty of the country. It should be noted that the first and decisive step was the development of criteria that determine the importance of individual industries and types of industries on which technological sovereignty depends. The second step is the formation of a list of these industries. The list of such industries is defined by the Decree of the Government of the Russian Federation No. 603 dated April 15, 2023.  The third step is the justification of a set of specific tax instruments to stimulate the development of these industries. It is the third stage that is being implemented, a number of priority tax incentives are already being actively applied (presented above), but a significant amount of unresolved socio-economic tasks of the state determines the need for further development of tax support tools.

In the search for additional financial resources to support, including tax, the development of branches of technological sovereignty, it is also possible to conduct a tax maneuver. I would like to recall the historical experience in the Russian tax system in the early 90s of the twentieth century. Along with VAT, a special tax was levied to support the development of the most important sectors of the national economy. The tax base of this tax was similar to the VAT tax base, and the tax rate was 3%. This special tax was abolished as violating the principle of single taxation.  However, the design of such a tax can be developed in such a way as to reduce the tax burden on the branches of "technological sovereignty" at the expense of other branches of the national economy.  The payers of this kind of tax should be Russian and foreign organizations engaged in the most profitable and least affected types of economic activity that meet certain criteria. A specific list of such criteria is fixed by a Decree of the Government of the Russian Federation. It should be noted that at present the state applies an excise taxation mechanism similar in purpose, but at the same time not violating justice, within which the state uses excise taxes on steel to withdraw excess profits from the metallurgy industry.

5. Formation of public mood in the conditions of election campaigns in 2023-2024. In addition to the above-mentioned tax maneuver in terms of increased taxation of the wealthy segments of the population, it is necessary to seriously consider the effectiveness of the currently available standard, social tax deductions for personal income tax, as well as property deduction in connection with the acquisition of real estate. The authors of this article in their earlier publications proved that the existing tax deductions cannot be recognized as effective and fair, including due to the fact that with a formal equal right to their application, people with high incomes can actually use them ^[6-8]. We are talking, first of all, about deductions for training, treatment, purchase of residential real estate. Even if we accept this scientific position, then from a practical point of view, it is not possible to cancel these deductions or lower their size. This will be extremely negatively received by society.  However, it is possible to revise the mechanism of their provision, taking into account the level of welfare of taxpayers. It is worth noting that a number of positive directions in this direction have already been implemented, in particular, since 2024, the maximum amount of social deductions for children's education has been increased to 100,000 rubles, and the combined social deduction to 150,000 rubles. However, even the indicated amounts of deductions do not correspond to the cost – the costs for which these deductions are given.

The formation of public sentiment in the conditions of the 2024 election campaign will be facilitated by the further support of such a wide part of the electorate as individual entrepreneurs, self-employed and representatives of small and medium-sized businesses in general. It is necessary to further search for additional effective measures of comprehensive, including tax support for the development of small and medium-sized businesses to solve a whole range of tasks: ensuring employment of the population and, on this basis, improving living standards; detenization of the economy; creating barriers to tax evasion due to the fragmentation of business.

POSSIBLE DIRECTIONS OF SOLVING THE PROBLEMS OF TAX POLICY IN THE CONDITIONS OF SANCTIONS

One of the most acute problems of the practical implementation of tax policy in the context of large-scale sanctions pressure from the collective West of its own is the search for effective ways to increase the revenue side of the budget. In scientific research, scientists have repeatedly considered various options for the development of tax policy during sanctions, among which the following areas are the most popular:

- establishment of personal income tax progression ^[9];

- application of a differentiated approach to setting the corporate income tax rate depending on the profitability of companies and a single simplified tax for SMEs engaged in priority industries ^[10];

- expansion of investment tax benefits and tax holidays ^[11];

- reduction of the burden on insurance premiums for individual taxpayers ^[12].

This article discusses two alternative options for the growth of the revenue side of the budget by shifting the tax burden on the population without prejudice to fairness and deterioration of the financial situation of persons with low and medium incomes.

Inheritance and gift tax instead of progressive income tax. The transition to a progressive income tax is politically short-sighted before the end of the 2024 elections. The proposal to move from proportional to progressive taxation of individuals is in itself very controversial. In 2001, a "historic" choice was made in favor of proportional personal income tax. From the standpoint of the principles of taxation formulated by A. Wagner, this decision can be assessed as a sacrifice of justice for the sake of the principle of sufficiency of taxation. A. Wagner, in the development of the principles of taxation of A. Smith, not only expanded their composition from four to nine, but also ranked the principles by groups. Combining the principles of taxation into four groups indicated the choice of priorities. A. Wagner put the interests of the state in the first place, i.e. financial and political principles (sufficiency and elasticity of taxation). The ethical principles of taxation, which include fairness, were given the third place. If it is impossible to apply all the principles simultaneously, it is necessary to sacrifice those that occupy lower positions in the rating.

The return from the proportional method of taxation to the progressive method will always be negatively perceived by society due to the ambiguity of the understanding of justice ^[13-22]. The authors of the article previously argued the inexpediency of returning to the progressive income tax in the article ^[7]. With the existing income gap between the poor and the rich in Russia, a progressive income tax will in no way be able to significantly smooth out the existing inequality. A positive response from the society will cause a revival in the Russian tax system of inheritance and gift tax.  The tax on property transferred by inheritance and donation was present in the tax system of the Russian Federation from 1992 to 2005 inclusive. The abolition of the tax from January 1, 2006 was primarily due to political motives: to exempt from tax the wealthiest individuals who managed to accumulate large amounts of property in the conditions of the formation of a market economy ^[23].  Inheritance and gift tax is widely used in world practice. It is charged in more than 80 countries, for example, in the USA, Canada, Germany, Belgium, Germany, France, Italy, Switzerland, Great Britain, etc. ^[24]. The fiscal value of this tax in all countries is very modest (in the OECD, the share of this tax varies from 0.01% in Austria to 1.6% of tax revenues in Belgium). Taking into account the average share of tax in OECD countries (0.4%), the volume of its receipts in Russia will amount to approximately 16.8 billion rubles. The main purpose of the inheritance and gift tax is its role as a tool for the redistribution of wealth.

In an earlier publication, the author argued the expediency of reviving the inheritance and gift tax in the status of a federal tax with 100% crediting of its revenues to local budgets.  Natural persons (except individual entrepreneurs) should become tax payers; the object of taxation is real estate, land plots, vehicles, securities and mutual funds, money in deposits, digital currencies or other digital asset of material values, as well as assets with high fiscal potential and a certain uniqueness (cultural values, art objects, etc.). art, antiques, precious stone products, collectible objects). The transfer of tax to local budgets when setting a complex progressive tax rate will allow to some extent to solve fiscal problems for local budgets. The non-taxable minimum and tax exemption of a number of categories will strengthen the fairness of this tax ^[25].

Shifting the tax burden from income taxation to consumption taxation. VAT as a kind of indirect taxation has a high fiscal potential. The volume of its revenues to the budget directly depends on the volume of sales. In terms of revenue from the sale of consumer goods, the increase in VAT receipts is a kind of indicator of the well-being of the population. In the field of industrial consumption, the volume of VAT payments to the budget largely depends on the budget financing of the branches of the national economy. Increasing the growth rates of defense industries and industries that ensure technological sovereignty, including through budget support, will logically be  contribute to increasing the fiscal effects of VAT. At the same time, we should not forget that it is for VAT that the most effective tax administration has been created in Russia to date. The indicated dependencies allow us to put forward a proposal on the possibility and expediency of increasing the VAT rate to solve the problem of increasing the revenue side of the budget.

When VAT was introduced in Russia in 1992, an unreasonably high tax rate (28%) was established. The miscalculation was eliminated after a year.  In 1993, the VAT rate was reduced to 20%.   In 2004, the second reduction of the tax rate was carried out to the level of 18%. In 2019, an unpopular decision was made to raise the VAT rate. It was again set at 20%. An increase in the VAT rate logically leads to inflation. According to Tikhonova A.V. and Zasko V.N., a sharp inflationary jump was recorded in 2019. For food products, almost 2 times. This effect took place in conditions when 33% of the population's expenditures on the purchase of food products fell on goods for which a reduced VAT rate was established. If there is a significant inflationary effect, it is possible to make a decision to increase the VAT rate only if the budget effect is significant and covers the costs of the inflationary effect. Calculations by Tikhonova A.V. and Zasko V.N. showed that in the period 2019- 2020, a significant budget effect was obtained under the influence of an increase in the nominal VAT rate ^[26].

The inflationary effect of an increase in the VAT rate leads to a decrease in real incomes of the population. However, this negative consequence of an increase in the VAT rate is psychologically perceived by the population more easily than a decrease in disposable income as a result of an increase in income taxation. In modern conditions, inflation has become an inevitable and constant companion. The population has developed certain adaptation mechanisms in the face of inflation. Independent regulation of the volume and structure of consumer demand for the population is easier than regulating the volume of disposable income with an increase in the income tax rate (the state of the labor market in terms of employment and wages is outside the sphere of influence of individual people).

In particular, with an increase in the base VAT rate by 1% to 21%, the consolidated budget of the Russian Federation will receive an additional approximately 593 billion rubles in revenue only, administered by the Federal Tax Service of Russia, this amount is equivalent to a third of the income from property taxes.

Thus, the proposed mechanisms for improving the tax policy of the Russian Federation, on the one hand, meet the interests and requirements of the budgets of the budgetary system of Russia and the national economy, will not cause a sharp public response in the current electoral cycle, and therefore can be implemented in practice.

Conclusions

The modern tax policy of the state is designed to effectively solve specific tasks of socio-economic development of society in relation to a specific period of time. The specifics of the tax policy depends on a combination of internal and external factors. In the current economic situation, external factors are of particular importance for the development of Russia's tax policy, among which economic sanctions are at the forefront. They define a set of tax incentive tools that are used to ensure economic growth. At the moment, the most frequently used tax instruments to mitigate the negative consequences of various external challenges in the world and Russian practice are: reducing the tax burden; simplifying tax administration and control; transferring tax obligations or tax amnesty, conducting a tax maneuver in order to redistribute the tax burden; searching for effective and fair tools to increase budget revenues.

The implementation of these areas has allowed us to achieve some positive effects, but the number of unresolved socio-economic problems in the conditions of sanctions restrictions, even in the near future, is so large that it justifies the need for further development of the Russian tax system. Taking into account all the factors mentioned above, the authors substantiate two taxation mechanisms that contribute to the implementation of a number of priority tasks of the state:

- introduction of inheritance and gift tax instead of the transition to a progressive income tax;

- increasing the VAT rate instead of switching to a progressive income tax.