Written by: George Friedman, Xander Snyder and Ekaterina Zolotova.
Low global energy prices have been a strain on the finances of many oil producers, but they’ve hit Russia particularly hard. Oil and gas accounted for 43% of Russia’s government revenue in 2015 and this figure was expected to drop to 36% in 2016, according to the World Bank. But this declining percentage doesn’t mean the government has become less dependent on energy; it’s simply a reflection of low energy prices.
And with its financial resources dwindling, Russia’s ability to defend against both external and internal threats will be severely tested. After all, the country will be hard pressed to find the cash needed to fund its defense and social welfare programs with declining revenue from one of its most important industries. As a result, the government will have to find new ways to raise revenue.
One option is reforming the personal income tax system. President Vladimir Putin has given some indications that he’s considering changing the current flat income tax rate to a progressive system. Another proposal, which is now being reviewed by Alexei Kudrin, an economic adviser to the president, is to raise the personal income tax rate from 13% to 17%.
At the current rate, personal income taxes make up 10% of all government revenue and 18% of all tax revenue. Raising personal income taxes would help the government reduce its dependence on energy. But the government can only make this move if Russians can afford to pay a higher rate.
A Model of the Average Russian
We, therefore, decided to stress test Russia’s income tax rate in order to determine how much savings an individual is left with after paying all their expenses. This will help determine whether a 4% hike in the personal income tax rate is feasible.
We did this first by constructing a sample budget for an average Russian citizen based on statistics provided by GKS, Russia’s statistics agency.
