Porsches, Peacocks and Taxing Luxury in Russia and Ukraine

Post-Soviet voters are jealous folk who like the idea of soaking the rich. So when the leaders of Russia and Ukraine were looking for a crowd pleaser in an election year, they both made the obvious choice: Introduce a luxury tax.

Now, both look likely to botch it.

Russian president-elect Vladimir Putin's proposal emerged amid the mass protests of the past winter, when he was seeking a way to win the allegiance of poorer Russians as a counterbalance to middle-class discontent. As he put it in a campaign speech, Russia's luxury tax would "be a publicly recognized form of payment for sacrificing investment in growth in favor of overconsumption and vanity."

Putin's rhetoric worked, and might have contributed to an election victory wrought largely in the country's poorer regions. According to the All-Russian Center for the Study of Public Opinion, the tax was his best-remembered campaign promise, with 74 percent of Russians polled saying they heard about it, and 80 percent saying they supported it.

Ukrainian President Viktor Yanukovich still has reason to be insecure as he prepares for parliamentary elections in October. His Regions Party, with only 19.5 percent popular support, lags behind its major rival, a bloc of opposition parties called the Front for Change and Fatherland. As a result, Yanukovich could end up with a hostile legislature, which in Ukraine plays a rather more important role than it does in Russia.

Hence, Yanukovich is taking aim at the rich with his own luxury-tax proposal. In Ukraine, the idea is about as popular as in Russia: 47 percent of Ukrainians support it unconditionally and another 36 percent are for it if it really falls only on the rich, according to a poll by RosBusinessConsulting Ukraine.

With the promises already made, it is up to financial and fiscal officials in both countries to work out the execution. Their distinct approaches highlight the differences between resource-rich Russia and largely agricultural Ukraine, and also between a politician who has already won and one who is still struggling.

In Russia, with Putin safely elected, the finance ministry has chosen a very forgiving definition of luxury. The additional tax would fall on real estate worth more than 300 million rubles ($10 million), and on cars with engines yielding more than 300 horsepower. This will not go a long way toward alleviating a situation in which the income of the top 10 percent of the nation's population exceeds that of the bottom 10 percent by a factor of 16.

“This is a proposal that makes sure no one will actually pay luxury tax,” moderate leftist legislator Oxana Dmitrieva told the daily Izvestia. Blogger odissey_77 pointed out that a Porsche Panamera would escape the extra taxation because it yielded exactly 300 horsepower, and that a house near Moscow, complete with tennis court, wine cellar, grottoed swimming pool and enclosure for peacocks would not be subject to the tax since it only sold for $8 million.

“If the owner of these things can consider himself a member of the middle class, what about the 99 percent of Russia's population who do not even have one hundredth of this wealth? What class do they belong to?” the blogger asked.

The parameters of the tax may yet change, but it is clear that only a very small number of people will ever pay it and its fiscal impact will be close to zero.

Ukrainians took a different approach, using square footage and engine size to define luxury. Deputy Prime Minister Sergei Tigipko initially suggested imposing the tax on apartments larger than 200 square meters, houses of more than 400 square meters and cars with engine volumes exceeding 3.4 liters. But Ukraine, which lacks Russia's oil wealth, actually needs the tax to produce some revenue. So the finance ministry later lowered the thresholds to 120 square meters for apartments, 250 square meters for houses, and 3 liters for car engines -- a level at which such items are common and relatively inexpensive.

Hence, a tax aimed at inequality in Ukraine, where the incomes of the top and bottom 10 percent differ by a factor of 18, could end up reaching deep into the middle class. Officials went into damage-control mode.

Economics Minister Pyotr Poroshenko, a billionaire, suggested that the tax be based on the market value of the real estate rather than its area. Prime Minister Nikolai Azarov wrote in his blog that "we definitely want to tax only true objects of luxury, those things one can live without."

In drafting a new version of the tax bill, Ukrainian bureaucrats will have to tread carefully. Voters are suspicious. Commentator Vitaly Portnikov expressed a common view in his blog: "I don't want people using their official positions to enrich themselves. And I don't want to hear moaning to the effect that if we can't change any of that, let's at least get these people to pay a little something for their luxuries. I don't want it because I know the tax money will be stolen by other thieves. Or maybe even by the same ones."

Russians have good reason to voice similar sentiments, but there's not much point: Putin is installed as president for another six years and he can now choose the manner in which to keep his promises. For Yanukovich, by contrast, the luxury tax issue could still do more harm than good.

(Leonid Bershidsky, an editor and novelist, is Moscow and Kiev correspondent for World View. Opinions expressed are his own.)

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