In addition, the government managed to push a new model of taxation for oil companies through the parliament. First, a subsoil use tax was established with its rate depending on the sector of the economy and the production costs. Second, a progressive rate of oil export duties was introduced, and oil products excises were increased. As global oil prices were rising unprecedentedly after 2003, these policy measures contributed to an immense increase in budget revenues. The increase of tax revenues from the oil sector allowed the government to establish the Stabilization Fund of the Russian Federation—a mechanism for sterilization of budgetary revenues intended to prevent high rates of inflation and to form financial reserves in case of a major decrease in global oil prices. The Stabilization Fund was established despite resistance from certain government ministers and from several MPs (members of the parliament) and lobbyists who were interested in spending extra revenues on current projects instead of saving funds for the future.37 The prudence of this policy became evident during the 2008–2009 economic crisis when the Reserve Fund of the Russian Federation (which was formed with the use of the Stabilization Fund’s resources) covered the Russian budget deficit.
Every aspect of the tax reform had its own influential opponents. MPs from the Communist Party of the Russian Federation fiercely opposed the flat rate of income tax. They considered it a means of tax evasion for the wealthy.38 Representatives of the state pension and social insurance funds argued against the unified social tax because they lost control over collection of money paid by companies. Finally, oil companies attempted to block the introduction of the subsoil use tax because it greatly increased taxation in that sector.39 However, despite this resistance from various corners the tax reform was implemented.
The key factor in this success story was Putin’s full-scale support of the reformers—Aleksey Kudrin, the minister of finance, and German Gref, the minister of economic development, who relied upon teams that included officials in their respective ministries and numerous experts and advisors. Besides the personal credibility of the reformers, based on the common experience they shared during their service in Saint Petersburg’s city administration, Putin considered creating an efficient tax system a priority for his agenda. Thus, he included the introduction of the flat rate of personal income tax in his Budgetary Address to the Russian Parliament, delivered in May 2000. This move consolidated the presidential majority in the State Duma40 in support of this decision. The decision to introduce the subsoil use tax was more complicated. Russian oil companies influenced the State Duma budgetary committee to a large degree and had support from several MPs. But despite lobbyists’ efforts, the government was able to squeeze this proposal through the State Duma. At the end of the day, the oil lobby accepted a consolation prize—the government would be prepared to decrease the subsoil tax rate to zero if the price of oil dropped below $8.00 per barrel; in any event, this did not happen.41
Another factor in the success of the tax reform was the concentration of policy-making in the hands of reformers and their supporters. Close connections between Putin, Kudrin, and Gref allowed the two ministers to insulate the decision-making process from their major opponents. Indeed, Putin unilaterally adopted many financial and economic decisions without the participation of the prime minister or the cabinet.42 For example, a bill on replacing numerous social taxation payments with the unified social tax (a flat rate payroll tax, paid by companies) was submitted to the parliament without the agreement of other state officials, including the heads of the pension and social insurance funds. The stability of the new rules of the game was supported by the long service of the reformers as ministers: Gref left the Ministry of Economic Development in 2007, and Kudrin lost his post as minister of finance in 2011.
Finally, the tax reform was not subjected to a long implementation process. The decision on the flat rate of the income tax was proposed and adopted within one year. Then the Ministry of Finance managed to protect this change from several initiatives to introduce progressive taxation, arguing that the new mode of taxation was efficient because budgetary revenues had increased. However, some elements of tax reform did not survive in the longer term: this was the case with the unified social tax, which provided governmental control over the use of funds but did not increase budgetary revenues as such. As a result, in 2010 Tatiana Golikova, then the minister of Public Health and Social Development, achieved a return to the previous scheme of social taxation payments. After that, the unified social tax was divided into several different social payments managed by the Pension Fund and Social Insurance Fund independently from each other.43
Preserving the Stabilization Fund became the government’s most difficult task. In 2006, the Investment Fund of the Russian Federation was established within the federal budget, and a certain amount of money from the Stabilization Fund was diverted to the Investment Fund. The new budgetary instrument was intended to accumulate financial resources to fund nationwide infrastructural projects. Soon, those resources were allocated to not only nationwide projects but also regional ones. In 2008, the Stabilization Fund was split into the Reserve Fund and the Fund for National Prosperity. The former performed the same functions as the Stabilization Fund, and the latter aimed to balance the budget of the Pension Fund of the Russian Federation.44 Although the use of the Stabilization Fund was of great help during the 2008–2009 economic crisis, it did not contribute to the country’s long-term development.
Finally, a side effect of successful tax reform was a major improvement in tax administration in Russia in the 2000s and 2010s. Tax officials who had to manage a limited number of clearly defined taxes and follow more transparent “rules of the game,” adjusted to new conditions better than many other state agencies. Although they still enjoyed great discretion in dealing with certain categories of taxpayers such as big state-owned companies or small businesses, the degree of arbitrariness largely decreased. Later, technological advancements (such as digitalization) also contributed to the better performance of state tax services. It is no wonder that the former head of the Federal Tax Service, Mikhail Mishustin, was promoted to the post of prime minister of Russia in January 2020.
However, even this success story was limited in scope. Another element of the reform initiated by Kudrin—the development of the principles of performance-based budgeting—did not achieve any significant results.45 The task of increasing the efficiency of public expenditures could not be resolved by the Ministry of Finance alone (even with presidential support). It required the efforts of several mid-and street-level bureaucrats and other participants in the budgetary process who would have to be suitably motivated and consent to shift their approach for effective use of budgetary spending. As with the case of administrative reform, there was a shortage of such officials in the state apparatus and limited incentives for an advancement of reform among the top political leadership. As a result, this reform failed.
Implementing tax reform demonstrated that the institutional foundations of a success story of policy changes heavily depend on presidential support of a well-formulated policy program. Such a program needs to be conducted by an administratively strong and consolidated team of reformers who can disregard various pressure groups and push through reforms that do not involve lots of participants at the implementation stage. But this case also displays the unique array of factors necessary for policy success. The lack of even one of these factors would lead to the window of opportunity closing for that reform’s implementation.